That only protects you at account creation time. How about this:
Password hash function is h. Client creates password p, hashes it 1000 times.
Account creation: Client sends h^1000(p) to server in the clear. Server stores h^1000(p) in plain text. Attacker eavesdrops h^1000(p), which is useless.
Log in: Client either looks up h^999(p), or calculates it from scratch starting at p. Client sends h^999(p) to server in the clear. Server hashes this to get h^1000(p), which matches what it has stored. Server replaces stored value of h^1000(p) with h^999(p). Client is permitted to log in. Attacker eavesdrops h^999(p), which is now also useless.
Log in 2: Client either looks up h^998(p), or calculates it from scratch starting at p. Client sends h^998(p) to the server in the clear. Server hashes this to get h^999(p), which matches what it has stored. Server replaces stored value of h^999(p) with h^998(p). Client is permitted to log in. Attacker eavesdrops h^998(p), which, again, has become useless.
...
Once the client gets down to around h^100(p), server (which has also been keeping count) starts prompting client to create a new password before the hashes run out.
(If you run out of hashes, you're screwed. You can log in one last time by sending p in the clear and having it stored in plain text. Attacker eavesdrops p, which is useless here but may be extremely useful elsewhere for obvious reasons. After this, you can never log in again.)
NOTE: obviously this assumes the hash function is irreversible, mostly free from collisions and quick to execute. Also, the user should ideally NOT log in like 1000 times in a week. Both achievable goals, though.