If you're running with a 64-bit version of Windows, you may need to install the 64-bit version of the JDK (not JRE) from java.sun.com. Then rename the 'java' folder in the Processing download to something else. Try re-running with that and see if it works.

If it doesn't work, I'd also recommend:
1) placing Processing in the root of your C:\ drive
2) doing the same with the Android SDK
3) adding the ANDROID_SDK environment variable to point to the SDK location
4) adding ANDROID_SDK/tools to your Windows PATH
5) adding the bin folder of your JDK installation to the PATH as well

Most of those are not necessary, but some piece of that should fix what's happening.

Can you detail some more abour 4 and 5?

WTF? why changing the java name to jaba worked?

Wow thanks for this, changing the java folder name worked for me as well on Win7 x64.  Does anyone know why this is?  Is it just an issue b/c i'm using a x64 bit version of windows?