Regarding the verbal challenge/response strategy: We used this approach to license a niche application on five thousand workstations world-wide for more than ten years. Our support team called it the "Missile Launch Codes" because of its similarity to the classic missile launch authentication process seen on old movies.
This is an extremely time consuming way to protect your program. It consumed enormous amounts of our staffs' and customers' time reading the codes to and from users. They all hated it.
Your situation/context may be different. Perhaps you won't be using it nearly as frequently as we did. But here are some suggestions:
Carefully consider the length and contents of the code: most users (and support staff) resent typing lots of characters. Many users are bad typists. Consider whether a long string and including punctuation marks and case sensitivity unduly burdens them compared to the amount of security added.
After years of using a verbal challenge/response implementation, we left it in place (as a fall-back) but added a simple automated system. We chose to use FTP rather than a more sophisticated web approach so that we didn't have to have any software running on our in-house server (or deal with our IT staff!)
Basically, we use FTP files to do the exchange that was previously done on the phone. The server places a file on the FTP server containing the challenge phrase. The file's name is the customer's name. Our support staff have a program that automatically creates this file on our ftp site.
The customer is instructed by our staff to hit a hot key that reads the FTP file, authenticates it, and places a response file back on the server.
Our support staffs' software has been polling waiting for the customer's software to create the response file. When it sees the file, it downloads it and confirms its contents, and deletes it from the server.
You can of course have this exchange happen as many times and in either direction as you need in a given session in order to accomplish your goals.
The data in the files can have the same MD5 keys that you would use verbally, so that it is as secure as you'd like.
A weakness in this system is that the user has to have FTP access. We've found that the majority of our users (all businesses) have FTP access available. (Of course, your customer base may not...) If our application in the field is unable to access our FTP site, it clearly announces the problem so that our customer can go to their IT staff to request that they open the access. Meanwhile, we just fall back to the verbal codes.
We used the plain vanilla Indy FTP tools with no problem.
No doubt there are some weaknesses in this approach (probably including some that we haven't thought of.) But, for our needs, it has been fantastic. Our support staff and customers love it.
Sorry if none of this is relevant to you. Hope this helps you some.