Before upgrading to 1.8 (Oct 2012) this is how we configured our sites in the ServiceDefinition.
In reply to sudhAnsu63's issue, I had the same problem where I would update the physicalDirectory attribute but it would reload the file and revert back to the old (now incorrect) configuration. I still don't understand why, but I noticed that VS would sometimes open multiple versions of the same file. I had to close all other files, make my edits, save and close the file, then it finally took my edits and started working. I believe editing the file externally to VS (like in notepad) might work. Oddly, once I got it working once, it does not seem to suffer this problem anymore.