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According to the documentation: [1] the deployment overlay feature is applicable for "swapping out deployment descriptors, modifying static web resources to change the branding of an application, or even replacing jar libraries with different versions."

Here it talks about "replacing jar libraries" which is not working as expected and causes the following error.

[1] https://docs.jboss.org/author/display/AS72/Deployment+Overlays

Follow the below sequence of deployment and overlay:
Steps to Reproduce:
------------------
Step-1). Undeploy if any existing application is deployed and then freshly deploy the application.

[standalone@localhost:9999 /] undeploy DeploymentOverlayDemo.war
[standalone@localhost:9999 /] deploy /home/jaysensharma/TestApp/build/DeploymentOverlayDemo.war

Step-2). Make some changes in java code "Hello.java" . Create a new JAR Hello.jar which we want to replace at (/WEB-INF/lib/Hello.jar) using deployment-overlay feature. In the attached ant based Demo just do "ant compile" to create a new Jar "${project.dir}/tmp/Hello.jar"

Step-3). Use the following command in order to replace the "/WEB-INF/lib/Hello.jar" with the newly created Hello.jar using deployment overlay feature as following:

[standalone@localhost:9999 /] deployment-overlay add --name=myOverLay_1 --content=/WEB-INF/lib/Hello.jar=/home/jaysensharma/TestApp/tmp/Hello.jar --deployments=DeploymentOverlayDemo.war --redeploy-affected

Above causes the following Exception:

12:09:59,736 INFO [org.wildfly.extension.undertow] (MSC service thread 1-2) JBAS018224: Unregister web context: /DeploymentOverlayDemo
12:09:59,760 WARN [org.wildfly.extension.undertow] (MSC service thread 1-2) JBAS017530: Could not delete servlet temp file /NotBackedUp/SVN_16_Jan/WildFly/build_Apps/wildfly-8.0.0.Beta2-SNAPSHOT/standalone/tmp/DeploymentOverlayDemo.war/org/apache/jsp
12:09:59,761 WARN [org.wildfly.extension.undertow] (MSC service thread 1-2) JBAS017530: Could not delete servlet temp file /NotBackedUp/SVN_16_Jan/WildFly/build_Apps/wildfly-8.0.0.Beta2-SNAPSHOT/standalone/tmp/DeploymentOverlayDemo.war/org/apache
12:09:59,761 WARN [org.wildfly.extension.undertow] (MSC service thread 1-2) JBAS017530: Could not delete servlet temp file /NotBackedUp/SVN_16_Jan/WildFly/build_Apps/wildfly-8.0.0.Beta2-SNAPSHOT/standalone/tmp/DeploymentOverlayDemo.war/org
12:09:59,762 WARN [org.wildfly.extension.undertow] (MSC service thread 1-2) JBAS017530: Could not delete servlet temp file /NotBackedUp/SVN_16_Jan/WildFly/build_Apps/wildfly-8.0.0.Beta2-SNAPSHOT/standalone/tmp/DeploymentOverlayDemo.war
12:09:59,787 INFO [org.jboss.as.server.deployment] (MSC service thread 1-5) JBAS015877: Stopped deployment DeploymentOverlayDemo.war (runtime-name: DeploymentOverlayDemo.war) in 56ms
12:09:59,789 INFO [org.jboss.as.server.deployment] (MSC service thread 1-8) JBAS015876: Starting deployment of "DeploymentOverlayDemo.war" (runtime-name: "DeploymentOverlayDemo.war")
12:09:59,799 ERROR [org.jboss.msc.service.fail] (MSC service thread 1-8) MSC000001: Failed to start service jboss.deployment.unit."DeploymentOverlayDemo.war".STRUCTURE: org.jboss.msc.service.StartException in service jboss.deployment.unit."DeploymentOverlayDemo.war".STRUCTURE: JBAS018733: Failed to process phase STRUCTURE of deployment "DeploymentOverlayDemo.war"
at org.jboss.as.server.deployment.DeploymentUnitPhaseService.start(DeploymentUnitPhaseService.java:166) [wildfly-server-8.0.0.Beta2-SNAPSHOT.jar:8.0.0.Beta2-SNAPSHOT]
at org.jboss.msc.service.ServiceControllerImpl$StartTask.startService(ServiceControllerImpl.java:1944) [jboss-msc-1.2.0.Beta2.jar:1.2.0.Beta2]
at org.jboss.msc.service.ServiceControllerImpl$StartTask.run(ServiceControllerImpl.java:1877) [jboss-msc-1.2.0.Beta2.jar:1.2.0.Beta2]
at java.util.concurrent.ThreadPoolExecutor.runWorker(ThreadPoolExecutor.java:1145) [rt.jar:1.7.0_21]
at java.util.concurrent.ThreadPoolExecutor$Worker.run(ThreadPoolExecutor.java:615) [rt.jar:1.7.0_21]
at java.lang.Thread.run(Thread.java:722) [rt.jar:1.7.0_21]
Caused by: org.jboss.as.server.deployment.DeploymentUnitProcessingException: JBAS018776: Failed to get content for deployment overlay myOverLay_1 at /WEB-INF/lib/Hello.jar
at org.jboss.as.server.deployment.ContentOverrideDeploymentUnitProcessor.deploy(ContentOverrideDeploymentUnitProcessor.java:70) [wildfly-server-8.0.0.Beta2-SNAPSHOT.jar:8.0.0.Beta2-SNAPSHOT]
at org.jboss.as.server.deployment.DeploymentUnitPhaseService.start(DeploymentUnitPhaseService.java:159) [wildfly-server-8.0.0.Beta2-SNAPSHOT.jar:8.0.0.Beta2-SNAPSHOT]
... 5 more
Caused by: java.io.IOException: VFS000017: Filesystem already mounted at mount point ""/content/DeploymentOverlayDemo.war/WEB-INF/lib/Hello.jar""
at org.jboss.vfs.VFS.mount(VFS.java:127) [jboss-vfs-3.2.2.Final.jar:3.2.2.Final]
at org.jboss.vfs.VFS.doMount(VFS.java:336) [jboss-vfs-3.2.2.Final.jar:3.2.2.Final]
at org.jboss.vfs.VFS.mountReal(VFS.java:423) [jboss-vfs-3.2.2.Final.jar:3.2.2.Final]
at org.jboss.as.server.deployment.ContentOverrideDeploymentUnitProcessor.deploy(ContentOverrideDeploymentUnitProcessor.java:67) [wildfly-server-8.0.0.Beta2-SNAPSHOT.jar:8.0.0.Beta2-SNAPSHOT]
... 6 more

12:09:59,805 ERROR [org.jboss.as.controller.management-operation] (management-handler-thread - 3) JBAS014613: Operation ("redeploy") failed - address: ([("deployment" => "DeploymentOverlayDemo.war")]) - failure description: {"JBAS014671: Failed services" => {"jboss.deployment.unit.\"DeploymentOverlayDemo.war\".STRUCTURE" => "org.jboss.msc.service.StartException in service jboss.deployment.unit.\"DeploymentOverlayDemo.war\".STRUCTURE: JBAS018733: Failed to process phase STRUCTURE of deployment \"DeploymentOverlayDemo.war\"
Caused by: org.jboss.as.server.deployment.DeploymentUnitProcessingException: JBAS018776: Failed to get content for deployment overlay myOverLay_1 at /WEB-INF/lib/Hello.jar
Caused by: java.io.IOException: VFS000017: Filesystem already mounted at mount point \"\"/content/DeploymentOverlayDemo.war/WEB-INF/lib/Hello.jar\"\""}}
12:09:59,809 ERROR [org.jboss.as.server] (management-handler-thread - 3) JBAS015860: Redeploy of deployment "DeploymentOverlayDemo.war" was rolled back with the following failure message:
{"JBAS014671: Failed services" => {"jboss.deployment.unit.\"DeploymentOverlayDemo.war\".STRUCTURE" => "org.jboss.msc.service.StartException in service jboss.deployment.unit.\"DeploymentOverlayDemo.war\".STRUCTURE: JBAS018733: Failed to process phase STRUCTURE of deployment \"DeploymentOverlayDemo.war\"
Caused by: org.jboss.as.server.deployment.DeploymentUnitProcessingException: JBAS018776: Failed to get content for deployment overlay myOverLay_1 at /WEB-INF/lib/Hello.jar
Caused by: java.io.IOException: VFS000017: Filesystem already mounted at mount point \"\"/content/DeploymentOverlayDemo.war/WEB-INF/lib/Hello.jar\"\""}}
12:09:59,814 INFO [org.jboss.as.controller] (management-handler-thread - 3) JBAS014774: Service status report
JBAS014777: Services which failed to start: service jboss.deployment.unit."DeploymentOverlayDemo.war".STRUCTURE: org.jboss.msc.service.StartException in service jboss.deployment.unit."DeploymentOverlayDemo.war".STRUCTURE: JBAS018733: Failed to process phase STRUCTURE of deployment "DeploymentOverlayDemo.war"