It's vs. its

Let's settle it:

It's signifies a contracted version of two words, ie "it is" or "it has". Basically, if you can break out the contracted "It's" within a sentence, your usage is correct:
"It's already happened." becomes "It has already happened."
"It's not my fault." becomes "It is not my fault."

Its signifies a possessive... it's a possessive pronoun that implies ownership or involvement within itself. It is also a neuter way of saying his or hers. For example:
A team is only as strong as its members.

I will never ever forget the time my history teacher in high school called me out in front of the entire class because of my misuse of the words it's and its in my hastily crafted papers on Chinese history. While this episode is still fresh in my mind, it dawned on me the other day that despite that embarassing episode, I could not remember which was which.