Regarding your questions:
(a) Does Hot deployment in Jboss 4.2.2 work? is it reliable?
It works fine. Is it reliable? It depends. Frequent re-deployments will cause memory usage to rise significantly, but AFAIK this is a Java.1.5 issue.
I use hot-deployment all the time (for devel purposes) and I need to restart JBoss after about 50 re-deployments on a 512MB machine
(b) is there a specific classloader adjustments I need to do to make it work?
(c) What are gotchas I should be careful about or work around them?
Make sure you 'touch' the WEB-INF/web.xml every time you re-deploy.
Also, if web-services are included, I have reliable results when I work with .WAR files instead of an expanded .war hierarchy. In the case of servltes, expanded .war hierarchy works fine.
The above information comes from my experience and should not be regarded authoritative.