Can anyone tell me how many bits of entropy there are per 7-bit ASCII character. More specifically, a program wishes to generate a session key by prompting the user to type N random key presses. The characters entered are hashed down to 128 bits by MD5 for subsequent use as a key.

Depends. You could use a fast timer and sample between keystrokes, then use the least significant byte of the difference like PGP does (for DOS, anyway). You could change that so it samples bits instead of bytes, but it's conceivable that you'll have less randomness that way. I've experimented with speeding up the timer IRQs on my PC for that but found it was superficially less random (in a pool of 256 bytes there were more duplicates).

What should the value of N be, such that the entropy of the user's string does not unnecessarily exceed the entropy of the hash?

With a decent timerr that samples bytes, I'd say 16 keystrokes. Use a cypher overtha random data to garbe it a bit. Rob