Early this year, on January 23rd, the State Department and the Department of Homeland Security put new passport regulations into effect. Basically, any US citizen re-entering the United States by airplane from Mexico, Canada or the Caribbean would need a passport. Puerto Rico and the US Virgin Islands, both US territories, were exempt from these new passport regulations. Those citizens coming back into the country by sea and land could still use a driver's license and birth certificate to prove their citizenship. The plan was to eventually change the requirements so that all citizens entering the country would be required to show their passport.
Well it turns out that nearly 73% of US citizens did not have valid current passports. The ensuing flood of applications for passports this spring and early summer caused a tremendous backlog at the regional passport offices. Many people were waiting months without receiving their new passports. Early this summer the State Department and the Department of Homeland Security eased the travel restrictions somewhat, allowing citizens back into the USA with proof of a request for a passport. It had to be an online request, but this proof of application would take the place of an actual passport. The easing of those rules only lasted through the end of September of this year.
As it stands right now the rules will get even tighter in January 2008. At that point any citizen entering this country by air, land or sea will need a valid passport. Some members of congress have been lobbying to push this requirement back to 2009, but as of now have not been successful.
So the bottom line of all this is that if you are planning a trip outside the USA any time after January 2008 you better plan on having a valid passport. It would also seem that online applications are very likely the best way to apply.