Don't quite understand all that, "All I want to do is be able to use PHP sending email through MY mail server and also make outlook to use my web server. Is this possible and why does it currently not work?"
But, to send email with php you can use this code:
$to = 'flip@domain'; //Change this to your email address
$subject = 'Wakeup bob!'; // This is the subject of your email
$message = '<b>yo</b>, whassup?';
$headers = "From: flip@domain\r\n" .
'X-Mailer: PHP/' . phpversion() . "\r\n" .
"MIME-Version: 1.0\r\n" .
"Content-Type: text/html; charset=utf-8\r\n" .
mail($to, $subject, $message, $headers);