1. Software
There are a lot of versions of Android versions out there. But you have to make sure that you have the latest stable version. Currently Gingerbread (version 2.3.x) is the latest stable version.
2. Hardware
There are cell phones like Samsung Galaxy S2 and LG OPTIMUS 2x which have dual core processor. Also note the amount of RAM and ROM which comes with the device.
Every phone has internal memory (called phone memory) and external memory (micro SD card memory).
If the phone has a suitable amount of internal memory, most applications installed via the android market will run smoothly.
3. Future ready
It is important to verify that your phone will be supported in future. With software updates your phone will have improved battery life and will also run smoothly.
4. Cost
Phones from the same company having similar features will have different cost.
Eg.: LG Optimus One P500 and LG Optimus Net
For comparison please see this link.
The only notable difference is the 200 MHz addditonal processing speed and Android Gingerbread present in LG Optimus Net.
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