I have now learned what my problem is, so for the benefit of anyone else who may have struggled with this here is the solution.
(BTW, why isn't this simple configuration item in the docucumentation?? I searched the entire section on "Custom LoginModules" and there is NO mention. Thanks to another posting to the forum I found the answer.)
Apparently JBoss uses the ProxyLoginModule to bootstrap a custom login module.
For example, my auth.conf is now:
Verify that the correct auth.conf is used. My installation (JBoss-2.4.4_Tomcat-3.2.3) does not use "$jboss_home/conf/default/auth.conf", it loads the "$jboss_home/conf/tomcat/auth.conf"