It seems that lately, Steve Ballmer, has started a campaign against Android, and now it's trying to hit Android where it hurts - the fragmentation issue. It's true that there is some problems with fragmentation between the 1.xx versions and the 2.xx versions. However, I think what was worst has passed, and the gap between major versions, compatibility wise, will be much smaller from now on.
In the end, what's Android's biggest strength it's also its biggest weakness - openness. Being open (or at least much more open than other OS's) is what allows it to be adopted so quickly by manufacturers from everywhere, which is why Android is skyrocketing right now. But this also means that they can modify it a lot, which creates quite a few inconsistencies from phone to phone.
Still, Android is in a much better position now than Windows Mobile is, and we'll see how WP7 will do, but I don't think it has a chance to beat Android anymore, simply because Android can be put on everything. This leads to increased overall popularity, which leads to increased smartphone popularity.
There might be some market share left for WP7 if the companies adopting it just want to keep Google in check, and have some bargaining power when they negotiate with Google.