There are a couple of chips used with arduino:
atmega 8 (8Kb memory)
atmega 168 (16 kb memory)
atmega 328 (32 kb memory)
atmega 1280 (128kb memory)
The first three chips are pretty simular to what they can do (except for memory space for your programs) Also the first tree chips are availlable in dip socket which is makes it easy to handle in d.i.y. projects.
The 1280 chip which is used on the mega has lot's more IO pins, so you can connect a lot more stuf.
Basicly you can develop on every model as long as it fits the memory.