Choosing the right API Level for my android application

You can find a breakdown of the different versions of Android in use here. Currently, if you target 2.1 (API 7) you'll only miss out on about 3% of the market. Targeting 2.2 will miss just under 20%, or a fifth of the market.

As for converting your app, you can check what API level things are available for in the Android Reference. You'll note a checkbox and dropdown menu on the top right of the browsing area that allows you to filter by API level - that's one way to help converting. The other is to set the target and minimum SDK versions which will help Eclipse know what to complain about in your code. The easiest way to see if something needs conversion, however, is to emulate and test.

EDIT: The API level dropdown moved from the top right to the top left, over the list of APIs.

This graph may help you make up your mind.

It is good to look at backward compatibility and in general, you should compile your application against the lowest possible version of the platform that your application can support.

You can determine the lowest possible platform version by compiling the application against successively lower build targets. After you determine the lowest version, you should create an AVD using the corresponding platform version (and API Level) and fully test your application. Make sure to declare a android:minSdkVersion attribute in the application's manifest and set its value to the API Level of the platform version. Good luck!

If you have

<uses-sdk android:minSdkVersion="4" android:targetSdkVersion="10"/>

then it will appear right down to 1.6, but make sure you don't use antyhing that they don't have in their API

edit: Don't bother with 3! :)

I started out developing for 1.5, but soon realized that only a small percentage of people still run 1.5. I generally develop at the 2.1 level, and leave it at that (unless you need features at a higher level). To change it, open your project properties, and while I don't have my environment open, there is an Android option where you will select what API level you want to target.