Dalvik: how Google routed around Sun's IP-based licensing restrictions on Java ME
Dalvik is a virtual machine, just like Java's or .NET's.. but it's Google's own and they're making it open source without having to ask permission to anyone (well, for now, in the future expect a shit-load of IP-related lawsuits on this, especially since Sun and Microsoft signed a cross-IP licensing agreement on exactly such virtual machines technologies years ago... but don't forget IBM who has been writing emulation code for mainframes since the beginning of time).
The Android SDK does not compile your Java source code into Dalvik's bytecode directly, but it first uses a regular java compiler to generate regular java bytecode (say, javac or the built-in Eclipse compiler) and then converts that bytecode into Dalvik's bytecode (the "dx" tool does this: convers .class/.jar into .dex files).
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there is no need to ship a java virtual machine on your Android-powered phone and you can use your regular Java standard edition to develop your phone application (means, you don't need to use Java ME anywhere at all).