According to
http://docs.jboss.org/ejb3/app-server/reference/build/reference/en/html/entityconfig.html
Section 1.3. EAR and WAR files
...For WAR files, JBoss 4.0.x does not yet support deploying a persistence archive with WEB-INF/lib as required by the spec.
Spilt the WAR up into a JAR and a WAR and put them as modules in an EAR, this works fine and JBoss recognises the persistence entities in the JAR....
Would stil be interested to know if JBoss plans to support WARs for entity archives....