Ok, I figured this thing out. I've seen my question posted on couple other forums but no one provided a definite answer. Here is the answer
The GUI Security Level Configuration Tool
http://www.redhat.com/docs/manuals/linux/RHL-8.0-Manual/custom-guide/ch-basic-firewall.html
is used to configure the firewall. It does not, however, display the current security state. That's why I kept seeing high level all the time.
I guess only a 2 days linux newbie would make that assumption
Thx for pointing me to iptables file. That's how I was able to determine that the changes I was making in GUI were taking effect.