Howdy, no, you don't set isolation levels within EJB 2.0. They are set on the resource itself now, although in EJB 1.0 you WERE able to specify isolation levels in the Deployment Descriptor.
Isolation levels define how protected an operation is from what other operations are doing, and determines how long locks are held, etc. So it is always a tradeoff between performance vs. integrity. If you have NO locks, obviously you have maximum concurrency, but everyone might step on everyone else's transactions and you might corrupt the data, so it really depends on the kinds of operations being done to the database (read vs. write, etc.)
The four isolation levels are often labeled as:
READ UNCOMMITTED (also called "dirty read")
SERIALIZABLE (has nothing to do with Java "Serializable", but means "one at a time")