Why is AVR used in Arduino?
Does anyone even care about what
  you're developing on?


Yes and no.  I've been developing on the AVR32 for a particular project, and the development environment (in particular the compile/program/debug cycle) is horrendous compared to, for instance, PIC32.

The customers don't care, except for cost and maintenance, and in the case of an arduino-like system the programmers wouldn't care because the arduino environment and development cycle is leaps and bounds better than the current AVR32 setup.


  I just wonder because there is such a
  strong contingent for AVRs in the
  Arduino family. I understand that they
  are the official processor but there
  isn't a reason the code couldn't be
  ported to an ARM or a Freescale
  architecture other than cost, right?
  As long as there is onboard memory, I
  figured there could be easy migration
  into those parts.


There's no reason another processor couldn't be used, but there's a very good reason they've chosen a low end 8 bit device rather than an ARM, MIPS, PowerPC, etc device: Ease of use.

If you've looked at the setup for the even the low end arms, it's an order of magnitude more complex (memory mapping, caching, etc) than an 8 bit processor.  But even more importantly - at the time there were no DIP arm processors, and these were meant to be used and buildable by artists and hackers, not necessarily electronic technicians and engineers who feel comfortable with even a 48 pin TQFP.

The reason the AVR was chosen over the PIC is that the PIC doesn't really have a widely used, open source, free C compiler, among other things (the SDCC port isn't mature).


  I see a lot of ARM in industry (seems
  like every vendor is pushing one into
  their designs) and was wondering why
  there wasn't more uptake in the
  Arduino developer world. Thoughts?


Mainly it's due to ease of use - complexity, easy to solder, cost, and the fact that there's not much need for it.  Developers like the idea of having a lot of power, but at the end of the day when all you need to do is move some servos and flash some lights with a low-end FFT, an 8 bit processor is just fine.

Even the low end cortex ARMS coming out in 28 pin packages are still SOIC, not DIP.

So the AVR had all the right features:  


Easy to solder
Easy to get via mail order all over the world
Free GCC C compiler
Easy to understand the processor and peripheral setup and usage
Cheap
Ubiquitous - lots of people and experience surrounding the AVR family


Largely this is still true - I don't know of an ARM in a dip format, and the adapters make it significantly more expensive than the AVR.  For the most part, manufacturers don't think that a DIP packaged 32 bit processor is going to be very profitable.