Hi Tom, welcome to the Cameralabs forums!
As you know, the APS-C-sized sensors used in the Canon Rebels, 20D and 30D are physically smaller than a full-frame sensor or a 35mm film frame.
Since one of the hardest things about making a lens is correcting it for good performance at the edge of the frame, it's clearly easier if the frame is that much smaller.
So Canon's EF-S lenses are only corrected for the smller APS-C frame, and wouldn't look great on a full-frame body. This correction also allows them to be smaller, lighter and cheaper than a full-frame equivalent.
Canon also exploited the fact the Rebels and the 20D and 30D have a smaller reflex mirror to allow EF-S lenses to extend a little further into the body - this again has optical advantages.
So the first reason is quality ahnd the second reason is physical incompatibility, which is why EF-S lenses can't be used on the older 10D, because even though it has an APS-C sensor, it has a mirror from a full-frame body.
To avoid physical problems, not to mention disppointment from quality, Canon gave EF-S lenses a slightly different fitting, so they physically can't be mounted on a full-frame body, or the 10D.
As for the question of focal lengths and labelling, that's one people have discussed for a long time. Most people understand what they get with a 35mm camera, hence the broad use of equivalent ranges. Very few people would say a compact has an 8-24mm lens for example - they'd say it had 35-105mm!
And where a lens is ONLY designed for a digital body, I agree, it makes sense to label it accordingly. So yes, since EF-S lenses will presumably ALWAYS be fitted to a body with a 1.6x crop, why not label them as such?
Probably the craziest example is Four Thirds, a system designed to be digital from day one with sensors using a 2x crop. So there was an ideal opportunity to label lenses with their equivalent focal length, but Olympus and the other Four Thirds guys decided not to.
It is a bit of a chicken and egg situation, but it doesn't look like we'll see a change in the near future!
What do other people think? Would you prefer lenses labelled with their true focal lengths or an effective focal length if they're only ever going to be fitted to digital bodies with a known field reduction value?