After making the following changes to /etc/sshd_config:

RSAAuthentication yes
UsePrivilegeSeparation no

I am able to install and run two sshd daemon's at the same time,
a "SYSTEM" daemon, and a "USER" daemon with the following:

$ sshd_system.sh

$ sshd_user.sh -P 23

I have not yet got it to work with /etc/sshd_config containing:

UsePrivilegeSeparation yes

as I get

Bad owner or mode for /var/empty

in /var/log/sshd_ross.log.

There are two ways to work around this problem:

1. Use a different sshd_config for the USER daemon:

$ sshd_user.sh -P 23 -f $HOME/.ssh/sshd_config

2. Always start the USER daemon with the following script:

#!/bin/sh
# sshd_user_restart.sh
cygrunsrv --stop sshd_${USER}
chown ${USER}.none /var/empty
cygrunsrv --start sshd_${USER}
chown system.system /var/empty

Hope this helps,

Ross