Note that Dalvik is essentially just an alternate stack-based virtual machine for bytecode that's been converted from the standard stack-based JVM bytecode. You still need a standard Java SDK to develop Android applications in order to compile the Java source code to JVM bytecode.
So far Google has been able to get the best of both worlds by leveraging the vast Java tools ecosystem but then in the final step they convert the standard JVM bytecode to run on their own Dalvik VM which means they don't have to pay license fees for the standard Java runtime. IMO this is what is really annoying Oracle. (To be fair there are also good technical reasons why they created Dalvik.)
I can understand where Oracle is coming from legally, but business-wise I think this lawsuit is bound to backfire. Google has the resources to defend themselves and move away from Java in the long term, but in the meantime Oracle has created serious uncertainty about the openness of the Java platform which will scare technically innovative players away from Java that don't have the financial and legal resources that Google does. So Oracle turns Java into the new COBOL, a technically moribund backwater that is only kept alive for legacy purposes.