Hey Mike,
After reading over your post, I think I know where you went wrong.
The section you are filling out is located under "Customize -> My Account", this section is used for Authentication. This is the email server information it will use to send the email, this is assigned for the account, not per user.
When you create users, you fill in an email address for them. When you create and send an email in Method, it will use the server information located on the "My Account" screen to Authenticate with your mail server. It will use the current user's email address(setup when you configured this user) for the "From" field in the email. If someone clicks on "Reply" from one of your emails, It will go back to the user that sent it.
This should help.