Hmmm, after updating the PATH variable, did you close and re-open a new command prompt? Try opening a command prompt and typing "echo %path%" then hit enter. It should show you what the current PATH varible is set to. Ensure that the Java path is in there. Make sure there is also a semi-colon ";" in between the different paths. If it appears to be listed when you do "echo %path%" but still not working, could you copy/paste the output to here?
One more thing you could try, edit the batch file and change the line trying to launch the jar file (java.exe -Xmx512M -Xms2G -jar server.jar) and change it to:
"C:\Program Files (x86)\Java\jre7\bin\java.exe" -Xmx512M -Xms2G -jar server.jar
Make sure to include the quotation marks (") around the path otherwise it'll complain at any spaces in the path. Keep in mind the path may also need to be edited to suit your installation. Same goes with the memory setup (-Xmx###M/G -Xms###M/G).
If that works, chances are it's something messed up with the system PATH variable. If that doesn't work, try reinstalling Java.
Sorry for the delay, but you caught me at the end of my work day yesterday, I was literally running out the door as I posted that last comment =P