I've been having trouble with the JENKINS_HOME and think I've figured out a way around the problem, but at the same time, would like to report a problem with the BUNDLED download.
At FIRST, I thought I was doing something wrong, but have confirmed the problem does NOT exist in the WAR that I install into my Tomcat 7 server.
If I load the SETUP.EXE, when the SERVICE starts up, it simply IGNORED my System Environment variables completely. Nothing I do changes this.
If I stop the service and download the WAR and load it into Tomcat it PROPERLY reads the Environment Variable and locates the appropriate folder.
Again, the problem is only with the windows Service Installer from the Windows Setup.
I have even set HUDSON_HOME (just in case).
(wasn't sure if CORE was the right place to put this).