Speaking as a user, I can play media, browse the web, send/receive email and SMS ... all at the same time, on my G1. No breaks in the media playing that I've been able to detect.

There's no question that virtual machines are slower than native code. That has already been said (including by me).

The part that matters is: is it noticeable to the user. And, as far as I can see/tell, it is not.

Dalvik's virtualization has not caused me (nor anyone else I know using Android) any speed issues.