I followed the instructions on this wiki page to set up encrypted db password in my *-ds.xml file on Jboss 4.0.4 and it worked.
http://www.jboss.org/wiki/Wiki.jsp?page=EncryptingDataSourcePasswords
Has anyone tried to do the same thing with the embedded container and got it to work?
it won't work yet on embedded container. We still need to port this functionality to the JBoss 5 stack (which is what E-EJB3 *really* is)