Major 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).
Thanks
(wasn't sure if CORE was the right place to put this).
[JENKINS-13530] JENKINS_HOME ignored on Bundled Windows EXE.
Jeroen Gordijn
added a comment - I am experiencing the same issue with Windows 7 
Steven Crawford
added a comment - I had the same problem on windows 7. I discovered that the file "jenkins.xml" contains the following xml:
<env name="JENKINS_HOME" value="%BASE%"/>
This appears to set the enviroment variable to the jenkins base directory. When I commented out the XML line, jenkins used the directory I had set correctly.
Steven Crawford
added a comment - I had the same problem on windows 7. I discovered that the file "jenkins.xml" contains the following xml:
<env name="JENKINS_HOME" value="%BASE%"/>
This appears to set the enviroment variable to the jenkins base directory. When I commented out the XML line, jenkins used the directory I had set correctly. 
Jeff Dege
added a comment - Here it is 2014, and I've also run into the problem. Spent an hour trying to set the JENKINS_HOME environment variable, both as a system variable, and the explicitly in the service's registry keys, and nada.
So I've changed jenkins.xml. What worries me is that future updates could change it back, and break everything long after everyone has forgotten that we'd needed to make this fix.
The idea that the artifacts should be forced to be placed in the same place as the executables is simply absurd.
Jeff Dege
added a comment - Here it is 2014, and I've also run into the problem. Spent an hour trying to set the JENKINS_HOME environment variable, both as a system variable, and the explicitly in the service's registry keys, and nada.
So I've changed jenkins.xml. What worries me is that future updates could change it back, and break everything long after everyone has forgotten that we'd needed to make this fix.
The idea that the artifacts should be forced to be placed in the same place as the executables is simply absurd. Behavior and how to configure the service is documented in the wiki.
Choose the directory where Jenkins shall be installed (directory must already exist. If not create it before hand). This will become JENKINS_HOME and used to store data files and programs alike.
Changing the configuration of services
The JVM launch parameters of these Windows services are controlled by an XML file jenkins.xml and jenkins-slave.xml respectively. These files can be found in $JENKINS_HOME and in the slave root directory respectively, after you've install them as Windows services.
While it's not explicitly mentioning JENKINS_HOME being set in the XML file, it's as close as you can get without having to mention every single option.
Therefore closing this as Not A Defect.
Confirmed. Installed Jenkins on Win 2008 R2 Server in C:\Program Files (x86)\ and trying to set JENKINS_HOME to E: drive - no dice :-/