I have made some progress in the meantime.
Just an update, I was able to start and stop the jboss server successfully from Eclipse Europa J2EE. Also eclipse deployed the project as a .war file no problems this time and it compiled fine. The thing I did different now was to update my JDK from 1.4 to 1.5 and Jboss to 5.0 beta 4 and deleted all the older versions of JDK (yeah , I had a handful). I have no idea why it didn't work before.
I would recommend newbies like me who don't want to pay for myeclipse to try eclipse J2ee.