Thanks -- This was the fix. Make sure you have connected to the admin connection in ArcCatalog. Right-click and choose "server properties" and go to the directories tab and change it there. If you haven't actually connected to the service and just right click on the server while its disconnected, you will not get these options. Which is what I must have done at first because I wasn't seeing the server properties.
I actually made the change within ArcServer Manager because I found the option there after not seeing it in ArcCatalog.
You will have to restart the service before the .cfg file is changed for that service.
Carmen