Thanks guys, your comments pointed me in the right direction and I was able to make the correct modifications.
Yes, I was using <java> not <jar>. Typo.
I am using the maven ear plugin and its usage threw me off a bit, and had that <java> module included in the application.xml. the documentation wasn't clear on the third party library vs client jar thing. Since both use the jarModule to specify themselves. I disabled it from putting it in the application.xml in this case.
That in addition to have the library in the default /lib directory as specified by the spec when no explicit <library-directory> element is specified in the application.xml. I could have also put this element in there like this <library-directory>lib</library-directory> to get the same effect, but I kept it out.
So for anyone who might have a similar issue, the final and correct structure looked like this:
test.ear
META-INF/application.xml
/lib/jsch.jar
applicaton1.jar
application2.jar
application3.jar
<?xml version="1.0" encoding="UTF-8"?>
<application version="5"
xmlns="
http://java.sun.com/xml/ns/javaee"
xmlns:xsi="
http://www.w3.org/2001/XMLSchema-instance"
xsi:schemaLocation="
http://java.sun.com/xml/ns/javaee
http://java.sun.com/xml/ns/javaee/application_5.xsd">
<display-name>test</display-name>
<module>
<ejb>application1.jar</ejb>
</module>
<module>
<ejb>application2.jar</ejb>
</module>
<module>
<ejb>application3.jar</ejb>
</module>
</application>
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