Note: Below description uses 32-bit Java JDK 7 update 21. Use latest one, installation procedure is similar.
Step 1: Download the Java JDK from here. Download exactly Java SE Development Kit (JDK), without any additives inside (bundles) - just regular JDK.
Step 2: We start the installation. After two (or maybe three) screens we come to the screen where we choose the installation location. Let's change the target directory to C:\Development\Java_7_32bit:
Step 3: Install the virtual machine (JRE) for the browser - leave the default target unchanged (C:\Program Files\...).
In case of any problems (errors about broken installer and so on), uninstall Java and try to repeat the whole procedure. I recommend to put installer file directly on C drive and start installation procedure again from there.
Step 4: Create new system variable named JAVA_HOME and we set its value to C:\Development\Java7_32bit
Step 5: Modify existing Path system variable by adding at the end value ;%JAVA_HOME%\bin