I'm spending considerable time in making my UI to work with keyboard input only. But in the end I'm not sure whether I can rely on the assumption that Android devices all have touch screens.
Is there a way to determine if an Android device has a touch screen?
You should research the existing devices and read the Android Compatibility Definition Document (CDD) and decide for yourself.
I have spent some considerable time trying to figure out this problem for myself. The posters above are correct that Android already powers some non-touch devices and will power Google TV in the near future, but as it currently stands, the CDD specifically requires that ALL Android devices MUST have a touchscreen.
Basically, the Android Compatibility program was created to hedge against the sort of fragmentation issues you're worrying about now. It lists a bunch of requirements, and if a device does not meet those requirements, it does not get access to Android Market. These requirements include a touchscreen, wireless communication, bluetooth, a camera, and much more.
If you research those tablets and netbooks, you will find that not a single one carries the Android Market. Augen recently tried to pull a fast one with their new GENTOUCH 78 tablet, but had to rescind their claims that the tablet would carry Android Market after being shot down by the Android Compatibility Team.
So, if you are only distributing your app through Android Market, you have nothing to worry about until Google changes the CDD. But if you'd like to offer your app on other app stores or as a direct download, then you'll have to worry about your key mode navigation issues.
If it's any consolation, I have found that many, many apps have the exact same problem; they are impossible to use without a touchscreen. Many of them also have serious issues with focus and the soft keyboard. Sometimes the keyboard stays up when it should be hidden. Sometimes you can't get the keyboard to pop up no matter how many times you click on an EditText. IMO, the Android framework does not handle these things all that well.
Given all that, it will certainly be interesting to see how Google TV fits into all this. Will they update the CDD to be compatible with their set-top boxes? Will they use a different SDK and CDD for Google TV implementations? Will they ignore the Compatibility Program altogether when it comes to Google TV? Your guess is as good as mine.
It seems that someone at Google has finally come forward and admitted that Android is not ready to run on a tablet: http://phandroid.com/2010/09/10/shocker-google-says-android-not-meant-for-tablets-in-its-current-state/
To me, this says that Google was not prepared for the accelerated adoption of the Android OS and has not adequately roadmapped the future of the platform. Supporting screens larger than 480x800 is barely possible, and Samsung was only able to do it by working closely with Google on the Galaxy Tab. So I'm not so sure we need to worry about non-touchscreen devices in the near future. They'll be here eventually, I'm sure, but when they do arrive we may see a separate app market just for those, or some altered filtering scheme on the existing market, a new CDD, who knows.
To me, this says that Google is still playing it by ear, and we'll just have to do the same.