I've been messing around with functional programming languages for a few years, and I keep encountering this phrase. For example, it is a chapter of "The Little Schemer, which certainly predates the blog by this name. (No, the chapter doesn't help answer my question.)
I understand what lambda means, the idea of an anonymous function is both simple and powerful, but I fail to understand what "the ultimate" means in this context.
Places that I've seen this phrase:

The title of chapter 8 of The Little Schemer
A blog: http://lambda-the-ultimate.org/
A series of "Lambda the ultimate X" papers: http://library.readscheme.org/page1.html (archived)

I feel like I'm missing a reference here, can anyone help?

Yes, it's simply a recurring phrase in the title of several papers, starting from a couple in the 70s, in which Sussman and Steele demonstrate the use of lambda calculus for programming, by means of a minimalist Lisp dialect named "Scheme" they devised for the purpose. You can find the papers themselves here; they're interesting and surprisingly relevant.
I'm not sure if this is ever explicitly stated, but it's clear (from context, having read the papers, and knowing the general background and research interests of the authors) that the phrase is simply a catchy slogan for their contention that lambda abstractions, as a computational primitive, are not only universal in the formal sense (of being able to encode any program in some fashion, however awkward), but universal in a practical sense that any and every construct present in other languages, even those that are baked-in from the ground up, can be reimplemented in a lambda-based language in a way that is both effective and natural to use.
The repeated phrase leads to the obvious generalized form "for all X, lambda is the ultimate X", which is the sense I've generally taken "Lambda the Ultimate" to mean as the blog name, noting that LtU is concerned with programming language design and theory. Ironically, LtU would probably also be one of the best places to find someone who could tell you about something for which lambda is not the ultimate implementation. :]
Note also that Sussman is one of the authors of SICP, a very influential textbook that also uses the Scheme language and spends a fair amount of time introducing lambda abstractions as a concept.
