Do you build the entity manager yourself? Placing it at the root of the .jar should make it available in the classpath. Other than that, I don't think AS7 tries to detect any hibernate.properties for bootstrapping Hibernate. It just looks for persistence.xml (the JPA mandated file).
Thanks, I just noticed the message in the log but I guess I can just ignore the message since I can define the properties in the persistence.xml file.