Michiel's answer is quite complete but I think I can contribute a bit more as I'm in a situation similar to yours. I come from series of DELL and Compaq workstations, I switched to the Mac about 10 years ago for work and at home. Now I work on both, a 2010 MBA and old (circa 2008) MBP.
Here is my experience relative to your questions:
- Will I miss the DVD drive, and upgrade ability if I am choosing a Macbook Air over Macbook Pro or a Thinkpad Machine?
Concerning the DVD drive probably not. I haven't used one in 2 years (the one on my MBP broke in 2010). I mostly use the MBA on the go... with the usual dev tools you won't need the drive. With my git repo and redmine for task management I have no problem with sharing data and projects between the computers. When it comes to quick backups I have a stack of USB keys and a NAS for Time Machine. When it comes to DVDs and CDs, rip them and you don't have to deal with the plastic relics anymore.
Concerning the upgrades, yes you will probably "miss" them. You can only upgrade the flash storage on the MBA... The 2010 MBA I use is just enough for Xcode, iPhone simulator, Eclipse, Android emulator and LAMP. If you buy a new one take the 8GB of RAM upgrade as the RAM is soldered to the motherboard. The 4GB will be your first and most limiting bottleneck.
But missing the upgrade ability is not the same as really needing it. So it's up to you.
- Is the form factor and battery backup time, worth the choice?
Yes & yes. It's genuinely the best thing. Not having to cary an entire desk with you (computer, power supply, cables and stuff) when you have to leave the home/office for a few hours is a relief. Carrying the MBA is equivalent to carrying a magazine (that you can't roll). Put it in a bag or a briefcase and you don't even notice it's there. Also not the least important factor, when you use it outside of the usual desk setup (on the couch, in the train, on the plane, waiting for the boarding...) it's extremely comfortable and light.
- Is it good for iPhone/Android Development?
As good as any equivalent computer. The mid 2012 MBA is really good. Mind that you can't do native iPhone dev on a non Apple computer, well... You can go the hackintosh way, but boy, it can be a pain in the %$$ when an update breaks the compatibility with your hardware.
- Will I be able to run my favorite open-source tools from Ubuntu, like GIMP/Blender etc.,? If not will I be able to dual boot Ubuntu? (I know I can do Windows)
Yes, most of the tools (when not distributed as apps) compile on OS X. Also have a look at the multiple open source distributions systems: MacPort, fink, homebrew, rudix. Check each of your tools as there is no general rule.
If you can't run your tools natively you can always use a VM: VirtualBox, VMWare Fusion, Parallels Desktop or dual boot to any OS you like.
Concerning other aspects of the MBA the screen is very good. I was worried it would be too small, but when my MBP failed I switched to my wife's MBA and got used to it in a mater of days.
The flash storage is great, hard drive intensive tasks are improved, boot time is very short (but that's tertiary as I reboot only once per a month at most).
Grab an external Ethernet adapter. For initial/full backups over LAN and in other situations it will be very useful.
You don't need a mouse. Contrarily to all the laptop PCs I owned, the mac has a truly unrivaled trackpad. It's so good I never cary a mouse with me. It seems like a secondary feature but wait until you get used to it and all the gestures...
My MBP is fixed now, and my wife reclaimed her MBA otherwise I would still be using it instead of my MBP.