openssh + pam authentication failing +md5 (?!) HELP HELP HELP !

This is the first time i really needed to seek the help of some one who has alot more expertise on this subject
since i have almost no hair left on my head which i didn't pull out  

I have installed: openssh 3.1 , openssl 0.9.6a and i use PAM , most things work perfect, till i wanted to use
pam for ssh, i enable also pam support for openssh, also enable md5 passwords support for openssh , added
the correct information to the pam file (/etc/pam.d/sshd) like 'md5' , but when i try to login from various
servers to that server then shortly said i get "PAM authentication failed, permission denied ... " . that
is the problem hehe

Paste:

Failed password for testuser from 192.168.150.52 port 34440 ssh2 
debug1: userauth-request for user testuser service ssh-connection method 
password 
debug1: attempt 3 failures 3 
debug2: input_userauth_request: try method password 
debug1: PAM Password authentication for "testuser" failed[7]: 
Authentication failure 
...     

my sshd_config, ssh_config are all correctly configured, beside the above passwd/login are also using
PAM, no problem

i did a test, i created with another tool a password for testuser, not md5, all of a sudden ssh worked (!??) ,
but when i change the pass with passwd (it then gets to be a md5) ssh refuses :((( ..

IMHO something goes wrong when the md5 password is read by PAM and that causes openssh to say permission
denied ... but guys, what in godsname goes wrong or what did i do wrong ? 

Any HELP is WELCOME - Cause i just don't see the jungle through the trees anymore ! 

Thanks all !

PS: the generic pam sshd file is what i use, added the md5 to it.

------------------------------------------------------------
Email account furnished courtesy of AntiOnline - http://www.AntiOnline.com
AntiOnline - The Internet's Information Security Super Center!

---------------------------------------------------------------------
Express yourself with a super cool email address from BigMailBox.com.
Hundreds of choices. It's free!
http://www.bigmailbox.com
---------------------------------------------------------------------