I made an error - corrected hastily before anyone could notice - in the last post that Ramya (wife, proof reader, grammar nazi) noticed, and then proceeded to give me a grave and admonishing look.
So, here's the rule for when to use "it's" and when to use "its": Use "it's" when you can use "it is", eveywhere else use "its".
Now, venture forth and conquer the world, thou proud grammaticus constructivus!
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Another way to look at it:
You wouldn't write hi's and you wouldn't write her's, so you also don't use it's for the possessive. Though, if you see enough other people making the mistake, eventually your brain turns off regarding seeing the problem.
As a side note, Thomas Jefferson almost always used it's as a possessive. (On the other hand, spelling rules back then really hadn't crystalized.)
There is an additional problem. We have two nearly identical keystroke sequences, and it is our weak right pinky finger that is responsible for the apostrophe, so even when the brain sends the squence "it's" we may see "its" show up; furthermore, "its" may misfire and come out as "it's".
For what it's worth, I forgive you.
When I'm not sure, I just sing Strong Bad's apostrophe song (mp3).
Sorry to be so late commenting, but I just noticed your post. Your rule is useful as far as it goes, but needs an addition:
--Use "it's" when you can use either "it is" or "it has"; everywhere else use "its."
Thus,
--It is late. It's late.
--It has been raining. It's been raining.