A-ha!  It's not the dac driver.  It's the apparmor driver.  'grep
apparmor /var/log/syslog | tail' gives me a bunch of:

Jan  3 19:04:06 localhost kernel: [11904.438804] type=1400
audit(1294103046.071:33): apparmor="DENIED" operation="open" parent=1
profile="libvirt-e58d045d-d4ed-39eb-09d2-c884173ff64c"
name="/tmp/level1.img" pid=15084 comm="kvm" requested_mask="r"
denied_mask="r" fsuid=117 ouid=117

The apparmor libvirt driver isn't writing policy to allow access to
level1.img.

** Tags added: apparmor

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https://bugs.launchpad.net/bugs/696318

Title:
  Starting VMs on qcow2 format with base images in level three fails

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