I seem to be making some progress by switching from java 1.6 back to 1.5, I'll update here later once I test things out a bit more.
OK, seems switching to java 5 was the key, near as i can tell everything works now.
Peter, thank you for your effort.
The last error you posted implies that you now have a jboss-web.xml file and that the contents are incorrect:
Failed to parse source: context-priority-classloader not found as a child of jboss-web
Also, when posting XML content, use the Code button to bracket it in [ code ] tags, and preview the text before posting.