JBoss version
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JBoss [Morpheus] 5.0.1.GA (build: SVNTag=JBoss_5_0_1_GA date=200902231221)

jboss.xml
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<?xml version="1.0" encoding="UTF-8"?>
<jboss>

<enterprise-beans>
<entity>
<ejb-name>MyFramework</ejb-name>
<local-jndi-name>JNDI_MyFramework</local-jndi-name>
<configuration-name>LEVEL 2</configuration-name>
</entity>
</enterprise-beans>

<container-configurations>

<container-configuration extends="Standard CMP 2.x EntityBean">
<container-name>LEVEL 1</container-name>
<container-cache-conf>
<cache-policy>org.jboss.ejb.plugins.LRUEnterpriseContextCachePolicy</cache-policy>
<cache-policy-conf>
<min-capacity>50</min-capacity>
<max-capacity>5000</max-capacity>
<overager-period>300</overager-period>
<max-bean-age>7200</max-bean-age>
<resizer-period>400</resizer-period>
<max-cache-miss-period>60</max-cache-miss-period>
<min-cache-miss-period>1</min-cache-miss-period>
<cache-load-factor>0.75</cache-load-factor>
</cache-policy-conf>
</container-cache-conf>
</container-configuration>

<container-configuration extends="LEVEL 1">
<container-name>LEVEL 2</container-name>
<insert-after-ejb-post-create>true</insert-after-ejb-post-create>
</container-configuration>

</container-configurations>

</jboss>

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When I started server with above configurations, it results in...
and did not start...

12:41:18,126 INFO [EjbModule] Deploying MyFramework
12:41:18,303 WARN [EjbModule] EJB configured to bypass security. Please verify if this is intended. Bean=MyFramework Deployment=vfszip:/D:/digite/jboss5/server/nitesh/deploy/niteshejbs.jar/
12:41:18,303 WARN [EjbModule] There are no interceptors configured. Check the standardjboss.xml file

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When I changed entity configurations to "LEVEL 1", following way, it worked....

<entity>
<ejb-name>MyFramework</ejb-name>
<local-jndi-name>JNDI_MyFramework</local-jndi-name>
<configuration-name>LEVEL 1</configuration-name>
</entity>

12:51:21,881 INFO [EjbModule] Deploying MyFramework
12:51:22,049 WARN [EjbModule] EJB configured to bypass security. Please verify if this is intended. Bean=MyFramework Deployment=vfszip:/D:/digite/jboss5/server/nitesh/deploy/niteshejbs.jar/

When "LEVEL 2" configuration is given to entity, it is not inheriting interceptors from standardjboss.xml
It is issue only in JBoss 5 .....

"LEVEL 2" configuration works fine when deployed in JBoss 4.2.3 ......