Image stabilization in lenses does really work! Sensors in the lens move a set of elements in the lens to compensate for shaking on the photographer's part. If you look through Canon and Nikon's lens lineup, you'll notice that most IS or VR lenses are telephoto. There are some exceptions, notably Canon's 17-55mm f/2.8 EF-S lens, 18-55mm and Nikon's 18-55, but otherwise the telephoto (> 60mm or so) is the typical recipient of a shake reduction module. Of course, other brands include the sensor in the body so you can use it on all focal lengths.
There are a couple of reasons for this:
1. Expense. It just costs more to add this to lenses, so getting minimal benefit out of it isn't worth it for wide angle lenses.
2. Stabilization is said to be more effective for telephoto lenses as they magnify any camera shake. Moving the camera side to side by a millimetre and you'll hardly notice on a 17mm wide angle, but put on a 400mm telephoto and you will barely be able to keep your subject centered unless you actively stand to reduce camera shake.
3. Another major factor is shutter speed. With the common rule of thumb you would use a shutter speed of 1/100s when using a 100mm lens. I find this to be fairly typical of what I can achieve with different focal lengths. However, if you are taking photos of anything moving, like people, you end up running into subject motion blur before the stabilization helps you.
As an example, consider taking a photo with a 50mm lens with IS. You could handhold this lens at around 1/60s. If the light drops you could get down to 1/15s using IS/VR, but if the subject is moving you'll still need 1/60s or 1/100s to stop the subject motion. Camera movement may be eliminated, but the subject is still moving and thus no benefit is given by stabilization.
Basically I'm trying to make the case for using IS/VR on longer lenses only, unless you take a lot of photos of static subjects. I went with the 17-55mm f/2.8 Canon lens mostly for the sharpness and fast aperture, not the IS. I find I rarely use the stabilization feature on the wide angle unless I'm shooting scenics, but almost always have it on for my telephoto lens.
17-55 IS is a great lens. Two times I use IS even at 17mm are: 1) interior dimly lit photos where I want F8 or higher or when I want to shoot low ISO instead of high. IS comes in very handy 2) When I want deliberate motion blur from the subjects but don't want the scene to be blurred. But I agreed, IS is most beneficial for telephoto lenses.