To be specific, you should set JAVA_HOME and JBOSS_HOME as follows:

set JAVA_HOME=c:\Program Files\Java\jdk1.5.0_07\bin
set JBOSS_HOME=C:\JBoss\jboss-4.0.3SP1

A few other tips (these are probably not a problem but could bite you later):

1) Don't install the JDK into Porgram Files.  Yes, I know that the 1.5 JDK 
installs there by default. But there are too many Java libraries that cannot 
handle spaces in directory names.

2) Don't set the classpath globally.  That is usually asking for trouble when 
the Java app picks up a class you didn't intend it to. I don't have classpath 
set on any of my machines. Besides, the JBoss run script sets up the necessary 
classpath and its classloaders know where to look for the jar files included 
with your applications.

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