Here is a copy of my smb.config file off of Swat.

Current Config

# Samba config file created using SWAT
# from UNKNOWN (127.0.0.1)
# Date: 2004/04/06 23:41:51

# Global parameters
[global]
workgroup = HOME1
netbios name = PEN2
interfaces = 192.168.0.3
guest account = ftp
hosts allow = iwill

[lin_book]
comment = Linux bookmarks
path = /home/me/bookmarks
read only = No
guest ok = Yes

[ed]
comment = ed's homedir
path = /home/ed
read only = No
guest ok = Yes

As you can see Swat does not know where it is getting the smb.config file from.
What is its problem? Where do I have to enter this in.
I have checked everything I know to check but apparently I have something.
Any ideas as to what it might be?

Apparently your SWAT found your smb.config file, or else it couldn't have created it.
The line "#from UNKNOWN (127.0.0.1)" only says that he couldn't find the hostname of your machine. SWAT accessed smb-conf from 127.0.0.1, which ought to resolve to localhost or something. Maybe SWAT only tries to resolve using DNS. In that case he won't find it unless you register a DNS name with your ISP.

This comment in smb.conf should be no problem, only a remark.