Ok, so just to recap all is ok now except for the new password email being sent correct? Do you have emails working elsewhere on your site? If so then there might just be a settings problem on your forgot password page.
Do you get emails when the new user registers? You could use the info from this for your forgot password settings if need be. Do you know the values to use for your mail server settings? Unless you have an SMTP server on your local testing server you will not send emails locally. You will need to have the pages served from a live server that has access to the SMTP server that you are entering values for.
Please post back with this info so we can determine how to proceed.
