I imported a test user (from my Moodle 1.9 installation), making sure to "Create Password if needed" in the options when uploading users.
I then tried to logon with that user. I enter the username and the password (the password the account used in Moodle 1.9) and try to login, but I simply get the "Invalid login, please try again" error message.
It doesn't send out an email with a new password. I have to go to the "Forgotten your password"? page, enter the ID/email, and get a new one sent.
It seems odd. If you upload users and "Create Password if needed", shouldn't Moodle automatically send out links to create new passwords rather than having users go and manually submit to a password change? Maybe not.
Anyway, I guess it works, just not the way I expected it it.