How are the Android Market ratings (stars) calculated? I was looking at the reviews for an application which was rated as 3.5 stars in the summary.

From reading the reviews, there were few 5's a lot of 1's and very little in between. My "gorilla math" estimate is of the 50 or so reviews I read, it was probably averaged a 2.75 or lower.

How is this rating calculated? All reviews in history? Most recent? Some kind of bad review filter I cannot see?
You're missing the ratings of users who did not leave comments.  A large, significant number of users do not leave comments, but they do rate apps.

This is what a developer will see in their dashboard, a breakdown of all ratings of their app:



So I have an average rating of about 4.57 out of 331 ratings.

However, in the dashboard I only have 6 pages of comments, and each page has up to 20 comments.  So I have no more than 120 comments on my app.  So you'd only be seeing 1/3 of the ratings for my app in particular.