[wvenable]

If "I forgot my password" is visibly a button then it's more effective than a link in that context.

I remember when Microsoft removed many buttons from their UI and replaced them with vaguely colored text (links) and it became a lot harder to figure out what to click on.

[mitchdoogle]

I would go for a verb that matches what the user actually is doing, i.e. "Reset Password". Also, I think a panel with a red or yellow background coming up after a couple of unsuccessful attempts to login with a complete sentence, "If you have forgotten your password, please visit this link to reset your password"