Once you create your javatwo folder and place java.exe in it, you must add it to your existing path variable for it to be able to work.
For instance as a temporary test run a command prompt:
mkdir javatwo
copy javaone\java.exe javatwo
set path=%path%;C:\javatwo
Now it will be in the path, HOWEVER.. the system can be confused if there's more than one java.exe binary in the path and will choose the first one it finds I believe.
You must use the System Properties (Start, Run, "sysdm.cpl") to make the change permanent, and system wide. Example above would only work for that specific command prompt session.
Congrats on working with PhoneGap, I used to use it to develop Android apps