We used FBA instead of Active Direct Integration. SharePoint is configured for SMTP. we have checked that this works. we receive alerts from within SharePoint if you sign up to them. However in the FBA users module where you can reset a users password by sending them a temp one to their email address this just doesn't work. Help!
Do the FBA Users you added have external email addresses outside of your domain (gmail.com, hotmail.com, microsoft.com....)? If that's the case, try setting up a user with an internal email address and see if it works. If the internal email address works, you need to allow 'Relaying' to the SMTP server from your SharePoint server.
There's some info here on allowing relaying with the Microsoft SMTP server: http://www.iis.net/learn/application-frameworks/install-and-configure-php-on-iis/configure-smtp-e-mail-in-iis-7-and-above