Bill Cheswick, of the "Firewalls and Internet Security; Repelling the Wily Hacker" fame, gives a great talk called "Rethinking Passwords" calling for a better solution:

http://www.youtube.com/watch?v=KRVRlhrLKkI [video, 22 min] http://web.cheswick.com/ches/talks/rethink.pdf [slides]