Error in 1.03 .NET Connector

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I can get about half way through the proxy creation process by selecting a number of BAPIs, but when it starts generating the proxy I get the error below. I am running VS.NET 2003 with the 1.03 connector. I also have the 1.3 version of J2RE installed.

To create a proxy directly From a SAP system, you must install a Java VM from JavaSoft

Inner error was:

INFO: using logging implementation All Logging

com.sap.aii.upload.api.LoginException$LoginFailed: Logon Failed

at com.sap.aii.upload.sap.SAPConnection.connect<SAPConnection.java:100>

at com.sap.aii.upload.sap.SAPConnection.<init> (SAPConnection.java:38)

at com.sap.aii.upload.tool.RFC2WSDLTool.getWSDLforRFCs(RFC2WSDLTool.java:81)

at com.sap.aii.upload.tool.RFC2WSDLTool.main(RFC2WSDLTool.java196) Exception in thread main