security, cryptography: ridiculous plea - response protocol?

ok guys only little game:

i have specifications project. during indicate ask following encrypt evidence over net, observant plea response protocol:

client ----------------------------- server

(1)ask plea -------------->

(2)    <---------------------------- send sha1 taken time
                                       (this challenge)
(3) sha1 xor evidence --------> it's equal sha1 xor stored password

(4)    <---------------------------- extend access

for those don't know sha stands secure hashing algorithm, customary algorithm cryptography.

i wish it's clear. doubt is: i mark packets 2 3 (the "challenge" "challenge xor password", i have tangible evidence only another xor between both!?!? there proceed exercise kind protocol??