So i got a chance to play further with the issue and this is what I'm seeing.
I started debugging the app and found where the exception is coming from. When the membershipRequest calls SendEmail [located in the Email class]
It fails on the following line in the try statement:
xslEmailTransform.Load(xsltTemplateFile, settings, resolver);
The exception caught is “The remote server returned an error: (407) Proxy Authentication Required
full SharePoint log of the event is:
System.Net.WebException: The remote server returned an error: (407) Proxy Authentication Required.
at System.Net.HttpWebRequest.GetResponse()
at System.Xml.XmlDownloadManager.GetNonFileStream(Uri uri, ICredentials credentials)
at System.Xml.XmlUrlResolver.GetEntity(Uri absoluteUri, String role, Type ofObjectToReturn)
at System.Xml.Xsl.Xslt.XsltLoader.CreateReader(Uri uri, XmlResolver xmlResolver)
at System.Xml.Xsl.Xslt.XsltLoader.Load(Compiler compiler, Object stylesheet, XmlResolver xmlResolver)
at System.Xml.Xsl.Xslt.Compiler.Compile(Object stylesheet, XmlResolver xmlResolver, QilExpression& qil)
at System.Xml.Xsl.XslCompiledTransform.CompileXsltToQil(Object stylesheet, XsltSettings settings, XmlResolver stylesheetResolver)
at System.Xml.Xsl.XslCompiledTransform.LoadInternal(Object stylesheet, XsltSettings settings, XmlResolver stylesheetResolver)
at System.Xml.Xsl.XslCompiledTransform.Load(String stylesheetUri, XsltSettings settings, XmlResolver stylesheetResolver)
at Visigo.Sharepoint.FormsBasedAuthentication.Email.SendEmail(SPWeb web, String emailTo, String xsltTemplateFile, IDictionary xslValues)
proceeded by this:
System.Exception: Error sending mail notification
at Visigo.Sharepoint.FormsBasedAuthentication.MembershipRequest.ApproveMembership(MembershipRequest request, SPWeb web)
at Visigo.Sharepoint.FormsBasedAuthentication.MembershipRequestControl.<>c__DisplayClass2.<OnCreatedUser>b__0()