JAVA_HOME is an environment variable. It's not required to set this for Java itself, but some tools use this to find the JDK. You're probably running some tool which expects this environment variable to be set.
Set the environment variable and restart Eclipse, and try to do it again. How you set the environment variable depends on which version of Windows you are using exactly. On Windows Vista, it is: right-click on My Computer, select Properties, Advanced System Settings, Advanced, button Environment Variables. Add it to the System variables (lower half of the window).