I put together a password strength meter for a signup form, and overall it works very well. It hooks into our DB for the "rules" (number of characters required, mix of letters and numbers, etc.), and uses that info to display a live meter that tells the user how strong their password is. The meter uses a 5-step color-coded scale: "weak" (red), "low" (orange), "medium" (lighter orange), "strong" (yellow), "very strong" (green).
What I'm curious about is this: no matter what you type, the meter immediately starts out displaying "weak" (red) because you haven't yet typed the minimum number of characters. Is it possible this would have a negative effect on conversion? It's almost like being guilty until proven innocent - you're told right away that your password is unsatisfactory before you even have a chance to finish typing it.