I also ran into the same thing. A long time 2.4.7 user trying to upgrade to the latest release of 3.x, 3.2.0RC2 to be exact.
In development mode you MUST be able to run your entire WEB and EJB modules in exploded format, otherwise you'll spend all your time, not to mention thrashing your disk, JARing and EARing.
What I've figured out is that the exploded subdirs under your "deploy" subdir MUST end with ".ear", ".war", and ".jar" respectively. This was NOT a limitation with 2.4.7. In 2.4.7 as long as the directory you mentioned in your application.xml existed and had the proper structure of a WAR or JAR file, it didn't care what the directory itself was called.
But not the case with 3.2.0RC2. So, if for example, you have a dir structure like this:
D:\JavaDev\projects\MyApp <--- HOME (of your project)
...and your application.xml looks like this:
...and you've set your URLDeploymentScanner in jboss-service.xml like this:
Everything should work. I've tried it and it's worked for me so far. Now I just have to make sure the exploded EJB module (myapp.jar) works just as well.
Hoped this helped somebody! I struggled with this for well over 2 days before I finally stumbled across the "you-have-to-name-the-subdirs-correctly" thing. I love JBoss, I just wish it was a little more documented, as well as things didn't change so drastically between every minor release. But just the same, keep up the great work guys.