HELP!! sshd permitting password free logins

[Gene]

I'm running version 5.3 of freebsd.
I'm not sure what I did - I was experimenting in sshd_config. sshd began 
to permit logins without benefit of password.

When logging in (I'm using putty from a local windows machine) I enter 
the user name. I'm presented with the challenge and the password prompt. 
If hit enter I get the second password prompt with echo on. If I enter 
anything else to the  first password prompt, or anything (or just the 
enter key) to the second prompt, I find myself logged on.

The allow groups directive in the config file works, only members of 
grp1 get logged on, but without passwords. This was working correctly 
before I started fooling around -

any ideas?
 
Cinfig file follows:
------------------------
#    $OpenBSD: sshd_config,v 1.59 2002/09/25 11:17:16 markus Exp $
#    $FreeBSD: src/crypto/openssh/sshd_config,v 1.33 2003/09/24 19:20:23 
des Exp $

# This is the sshd server system-wide configuration file.  See
# sshd_config(5) for more information.

# This sshd was compiled with PATH=/usr/bin:/bin:/usr/sbin:/sbin

# The strategy used for options in the default sshd_config shipped with
# OpenSSH is to specify options with their default value where
# possible, but leave them commented.  Uncommented options change a
# default value.

# Note that some of FreeBSD's defaults differ from OpenBSD's, and
# FreeBSD has a few additional options.

#VersionAddendum FreeBSD-20030924

#Port 22
#Protocol 2,1
#ListenAddress 0.0.0.0
#ListenAddress ::

# HostKey for protocol version 1
#HostKey /etc/ssh/ssh_host_key
# HostKeys for protocol version 2
#HostKey /etc/ssh/ssh_host_dsa_key

# Lifetime and size of ephemeral version 1 server key
#KeyRegenerationInterval 3600
#ServerKeyBits 768

# Logging
#obsoletes QuietMode and FascistLogging
#SyslogFacility AUTH
#LogLevel INFO

# Authentication:

LoginGraceTime 120
PermitRootLogin no
#StrictModes yes

#RSAAuthentication yes
PubkeyAuthentication no
AuthorizedKeysFile    .ssh/authorized_keys

AllowGroups grp1

# rhosts authentication should not be used
#RhostsAuthentication no
# Don't read the user's ~/.rhosts and ~/.shosts files
#IgnoreRhosts yes
# For this to work you will also need host keys in /etc/ssh/ssh_known_hosts
#RhostsRSAAuthentication no
# similar for protocol version 2
#HostbasedAuthentication no
# Change to yes if you don't trust ~/.ssh/known_hosts for
# RhostsRSAAuthentication and HostbasedAuthentication
#IgnoreUserKnownHosts no

# To disable tunneled clear text passwords, change to no here!
PasswordAuthentication no
PermitEmptyPasswords no

# Change to no to disable PAM authentication
ChallengeResponseAuthentication yes

# Kerberos options
#KerberosAuthentication no
#KerberosOrLocalPasswd yes
#KerberosTicketCleanup yes

#AFSTokenPassing no

# Kerberos TGT Passing only works with the AFS kaserver
#KerberosTgtPassing no

#X11Forwarding yes
#X11DisplayOffset 10
#X11UseLocalhost yes
#PrintMotd yes
#PrintLastLog yes
KeepAlive yes
#UseLogin no
#UsePrivilegeSeparation yes
#PermitUserEnvironment no
#Compression yes

#MaxStartups 10
# no default banner path
#Banner /some/path
#VerifyReverseMapping no

# override default of no subsystems
Subsystem    sftp    /usr/libexec/sftp-server