There are a lot of useful articles in the Microsoft Knowledgebase to help you resolve the problem where sharepoint won’t send out email alerts. Some of them are really complex.
BUT!!!! Before you spend hours (like I did) trying all the complex solutions to make it work, try the simplest solution first:
Make sure your mail server allows relays from itself. In exchange, go into the SMTP server properties (Start / Programs / Microsoft Exchange / System Manager / Servers / My Server / Protocols / Smtp / Default Server / Access / Relay / “Only the list below” – Granted to 127.0.0.1.