Eldarerathis summarized it very well. To add some things: The 1.1 version was internally called Petit Four by Google, and that's how it all began. Google is installing a giant pastry on their lawn at Mountain View each time a new version is about to be launched.
You can see pictures of that display at different stages here:
Donut, Android logo, Nexus one, Cupcake, Eclair
Gingerbread, Icecream Sandwich, Honeycomb