Have you tried using the source version instead of the exe? I've got the source version running as a service on 2 machines. It may be that the exe is missing something that's required for running web2py as a service. (If you do try from source, make sure you also install the win32 python extensions).
As far as setting the parameters, it's the options.py file - just open it up in your favorite text editor. If you haven't already, you'll probably want to refer to http://web2py.com/book/default/chapter/11#Start-as-Windows-Service ~Brian
