Canon explains why it doesn’t use in-body image stabilization in the “Rebel XTi White Paper”. The following is extracted from the white paper:

“Some of Canon’s competitors have chosen to use in-body image stabilization. The technique involves moving the image sensor in a controlled fashion, based on signals from movement detecting sensors in the camera body. The obvious advantage of this system is that users have some sort of stabilization available with almost any lens they connect to the body. Short focal length lenses require smaller sensor deflections; 24 or 28 mm lenses might need only 1 mm or so. Longer lenses necessitate much greater movement; 300 mm lenses would have to move the sensor about 5.5 mm (nearly 1/4”) to achieve the correction Canon gets with its IS system at the same focal length. This degree of sensor movement is beyond the range of current technology. Short and ‘normal’ focal length lenses need stabilization much less often than long lenses, so the lenses that need the most help get the least.”

In-Lens Systems

Advantages
1. More effective with longer lenses
2. You don’t pay for it except with the lenses you need it for
3. You see the stabilization effects through the viewfinder

Disadvantages
1. More expensive, especially if you want the feature in more than one lens
2. Not available with all lenses

In-Body Systems

Advantages
1. Works with every lens you mount to the body, and may be the only option for many shorter and faster lenses
2. Less expensive, especially if you want the feature with more than one lens

Disadvantages
1. Progressively less effective with longer and longer lenses
2. Progressively harder to implement with larger image sensors.

Website : Canon Rebel XTi White Paper (in PDF)