The JACK® compiler needs to be able to locate your java compiler, javac. The message indicates that the java compiler can't be found. You need to have installed a JDK (Java Development Kit) and you need to add the bin directory of wherever your JDK is installed to the PATH environment variable. Unfortunately the Java installer may not do this for you. Under Windows 2000/XP, you can do this from the Control Panel, under System, in the Environment tab. Under Windows 95/98 etc. you would need to edit C:\AUTOEXEC.BAT.
To test this, open a Command Prompt window and type javac and see if the command is found. If found, it should complain about being called without any java file arguments. If it is not found, then there is still a problem. You may need to log out or reboot after setting the PATH variable.
One other potential problem is if your PATH environment variable has quotes in it. If so, the JDE may not be able to compile your programs. Edit the PATH as described above, and remove any quotes.