Borate, if I do what you say, then I see the "open command window here" option in both drives and regular folders. The specific placement of the option in the context menu varies - and it's never above the first separator. I guess this means that different programs install their own items in the context menus and you have a different set of problems installed.
Now, clicking on that option just opens a command prompt for me, no problems there. For fixing your problem, try this tutorial
by Brink and also look for related tutorials at the end of the page.