I am assuming you are using ITABLES and IPCHAINS. This single script will allow you to run a linux machine with the 2.4.12+ kernel (RedHat 7.1+(with errata) fall into this category, as does Debian Woody, Mandrake 8.1+ with errata, Slackware 8.1, and others...) and iptables v1.2.6+ due to some wierdness in rule writing.
 
This script allows one machine to have a DHCP configured Public IP Address on ETH0 (you can change it...) and ETH1 being the Private interface, you run DHCPD on the Private Interface only. It provides anti spoofing, and connection tracking all in one.
 
 
And to answer your question, the file called /etc/sysconfig/iptables exists so.... it will always read that config. either remove it and "reset" your level... or Reset your level and do:
Code:

service iptables save

 
He on is the script included...
 

Code:

#!/bin/sh##  Notes: This shell script is for iptables v1.2.6+ and 2.4.12+ kernels, as#         there are glaring problems in previous versions. It may work, but#         I would not guarantee it to work completely right.##         I am assuming that the public interface is an ISP and the private#         interface is static. Firewall serves as Private DHCP server, and#         uses DNS from the internet. I included services that some like to#         foolishly run...  You can comment out mail, ftp and web. I would#         leave ssh for obvious reasons##         By default this script DROPS everything, the rules allow exception,#         using stateful checking and allowing exisiting conversation to#         continue, so you can run this script witout interruption of stuff.#         Also by default the script trusts the private interface, allows#         any traffic or conversation started by the private side. IOW, it#         will block anything trying to come in, without you asking for it.#  function check#check() {  if test ! -x "$1"; then    echo "$1 not found or is not executable"    exit 1  fi}#  function log#log() {  if test -x "$LOGGER"; then    logger -p info "$1"  fi}#  exec locations#MODPROBE="/sbin/modprobe"IPTABLES="/sbin/iptables"IP="/sbin/ip"LOGGER="/usr/bin/logger"#  making sure they exist#  and are executable#check $MODPROBEcheck $IPTABLEScheck $IP#  PUB_IF assumed ISP_dynamic#PUB_IF="eth0"#PUB_IP="10.0.0.1"#PUB_SNM="255.0.0.0"#PUB_NET="10.0.0.0"#PUB_SNML="8"#  PRIV_IF assumed static#PRIV_IF="eth1"PRIV_IP="192.168.1.1"PRIV_SNM="255.255.255.0"PRIV_NET="192.168.1.0"PRIV_SNML="24"cd /etc || exit 1#  sending to syslog#log "Activating firewall script"#  turning off forwarding (temp)#echo "0" > /proc/sys/net/ipv4/ip_forward#  setting good defaults for traffic#echo 1 > /proc/sys/net/ipv4/conf/all/rp_filterecho 0 > /proc/sys/net/ipv4/conf/all/accept_source_routeecho 1 > /proc/sys/net/ipv4/icmp_ignore_bogus_error_responsesecho 30 > /proc/sys/net/ipv4/tcp_fin_timeoutecho 1800 > /proc/sys/net/ipv4/tcp_keepalive_intvlecho 0 > /proc/sys/net/ipv4/tcp_ecnecho 0 > /proc/sys/net/ipv4/tcp_timestamps#  flushing the toilet#$IP -4 neigh flush dev $PRIV_IF#  setting default policies of DROP#$IPTABLES -P OUTPUT  DROP$IPTABLES -P INPUT   DROP$IPTABLES -P FORWARD DROP#  getting rid of any exisitng chains and tables#cat /proc/net/ip_tables_names | while read table; do  $IPTABLES -t $table -L -n | while read c chain rest; do      if test "X$c" = "XChain" ; then        $IPTABLES -t $table -F $chain      fi  done  $IPTABLES -t $table -Xdone#  loading all the iptables modules#MODULE_DIR="/lib/modules/`uname -r`/kernel/net/ipv4/netfilter/"MODULES=`(cd $MODULE_DIR; ls *_conntrack_*  *_nat_* | sed 's/\.o.*$//')`for module in $(echo $MODULES); do  if [ -e "${MODULE_DIR}/${module}.o" -o -e "${MODULE_DIR}/${module}.o.gz" ]; then    $MODPROBE ${module} ||  exit 1  fidone#  Rule NAT#$IPTABLES -t nat -A POSTROUTING -o $PUB_IF  -s $PRIV_NET/$PRIV_SNML -j MASQUERADE$IPTABLES -t nat -A POSTROUTING -o $PRIV_IF  -s $PRIV_NET/$PRIV_SNML -j SNAT --to-source $PRIV_IP#  Setting stateful inspection and allow already#  connected conversations to continue#$IPTABLES -A INPUT   -m state --state ESTABLISHED,RELATED -j ACCEPT$IPTABLES -A OUTPUT  -m state --state ESTABLISHED,RELATED -j ACCEPT$IPTABLES -A FORWARD -m state --state ESTABLISHED,RELATED -j ACCEPT#  public interface anti-spoofing rule so baddies claiming#  to be from the prviate network interface, can't make it in.#$IPTABLES -A INPUT  -i $PUB_IF  -s $PRIV_NET/$PRIV_SNML -j DROP$IPTABLES -A FORWARD  -i $PUB_IF  -s $PRIV_NET/$PRIV_SNML -j DROP#  block fragments, a sure sign baddies are trying#$IPTABLES -A OUTPUT -p ip  -f  -j DROP$IPTABLES -A INPUT -p ip  -f  -j DROP$IPTABLES -A FORWARD -p ip  -f  -j DROP#  firewall uses DNS server on internet#$IPTABLES -A INPUT -p tcp  -s $PRIV_IP  --destination-port 53  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT -p udp  -s $PRIV_IP  --destination-port 53  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT -p tcp  --destination-port 53  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT -p udp  --destination-port 53  -m state --state NEW -j ACCEPT#  firewall serves as DHCP server for LAN (listen rule)#$IPTABLES -A INPUT -p udp  -m multiport  -s $PRIV_IP  --destination-ports 68,67  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT -p udp  -m multiport  -d $PRIV_IP  --destination-ports 68,67  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT -p udp  -m multiport  -s $PRIV_NET/$PRIV_SNML  --destination-ports 68,67  -m state --state NEW -j ACCEPT#  firewall serves as DHCP server for LAN (response rule)#$IPTABLES -A INPUT -p udp  -m multiport  -s $PRIV_IP  --destination-ports 68,67  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT -p udp  -m multiport  -d $PRIV_IP  --destination-ports 68,67  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT -p udp  -m multiport  -d $PRIV_NET/$PRIV_SNML  --destination-ports 68,67  -m state --state NEW -j ACCEPT#  'masquerading' rule#$IPTABLES -A INPUT  -s $PRIV_IP  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT  -s $PRIV_NET/$PRIV_SNML  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT  -m state --state NEW -j ACCEPT$IPTABLES -A FORWARD  -s $PRIV_NET/$PRIV_SNML  -m state --state NEW -j ACCEPT#  firewall serves as mail server (for those that do this)#$IPTABLES -A OUTPUT -p tcp  -m multiport  -d $PRIV_IP  --destination-ports 143,993,110,25,465  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT -p tcp  -m multiport  --destination-ports 143,993,110,25,465  -m state --state NEW -j ACCEPT#  firewall serves as mail relay (for those that do this)#$IPTABLES -A INPUT -p tcp  -m multiport  -s $PRIV_IP  --destination-ports 143,993,110,25,465  -m state --state NEW -j ACCEPT$IPTABLES -A OUTPUT -p tcp  -m multiport  --destination-ports 143,993,110,25,465  -m state --state NEW -j ACCEPT#  firewall serves as web-server (for those that do this)#$IPTABLES -A OUTPUT -p tcp  -m multiport  -d $PRIV_IP  --destination-ports 80,443  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT -p tcp  -m multiport  --destination-ports 80,443  -m state --state NEW -j ACCEPT#  firewall serves as ftp-server (for those that do this)#$IPTABLES -A OUTPUT -p tcp  -m multiport  -d $PRIV_IP  --destination-ports 20,21  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT -p tcp  -m multiport  --destination-ports 20,21  -m state --state NEW -j ACCEPT#  ssh access to firewall (yes it's a global thing)#$IPTABLES -A OUTPUT -p tcp  -d $PRIV_IP  --destination-port 22  -m state --state NEW -j ACCEPT$IPTABLES -A INPUT -p tcp  --destination-port 22  -m state --state NEW -j ACCEPT#  'catch all' rule to make sure#$IPTABLES -A OUTPUT -j DROP$IPTABLES -A INPUT -j DROP$IPTABLES -A FORWARD -j DROP#  turning forwarding back on#echo 1 > /proc/sys/net/ipv4/ip_forward

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.