OK I've got it working.
1.) The "Source not found" message is not an error. Eclipse is running the deployed files but has had a problem. By pointing to where the source files are it can highlight the problem lines.
2.) This then allowed me to step into the JBoss classes where I had problems. This was resolved by re-installing JBoss AS. The initial installation was "EJB 3" with "default configuration. The reinstallation was "EJB 3" with "all configuration."
After that everything worked.
3.) Thanks to JBossZone again. However the recommendation to install a classpath environmental value didn't seem necessary. Infact when I tried this the following problem occurred.
Java Build Path Libraries JBoss EJB3 Libraries[error] Access rules: No rules defined
and none of the EJB 3 annotations was then recognised.
However everything is now working. EJB 3 is looking better than EJB 2. Life is great. I'm going on a celebratory walk round the block.