Fragmentation is, of course, a huge point for Android detractors. This is a very real manifestation of that which shows that Android may stagnate in the future due to the inability to develop features for a significant number of devices.
However, for the most part, Android as it sits today has a low level of fragmentation compared to what could happen. I recently developed an Android app for 1.6-2.2 and only had a couple fragmentation issues (performance related and contacts API). Google and its partners really need to take a long look at the direction of Android and resolve the fragmentation now while its possible.