Membership and PayPal

This may be silly, but how does PayPal communicate back to let the membership plugin know a user paid and payment was successful.

Here is the problem I am essentially having:

-->user signs up
--> gets subscription options
--> Selects option and Pays
--> goes back to the site
-->USER CAN'T LOGIN (error: Sorry, this account is not active.)

When I check the members list, the user is set to INACTIVE

info:

WordPress:3.02 Multisite
Membership plugin : Version 1.0.3 (I tried the latest upgrade, it gave a couple of errors, that I believe others have already submitted)
No Error Log
Settings: super-admin --> options --> Allow new registration: Logged in users may register new sites.

PayPal settings: No IPN set and No Auto Return (testing with and without)

Please help.