Yes Dalvik makes Jazelle useless. The only question is was Jazelle useful to begin with or is it 90% marketing hype? A good JIT or AOT(ahead of Time) compiler tends to give much better performance than trying to use specialized instructions. The register based approach of Dalvik might be faster than a traditional java bytecode interpreter but if the difference in minor between that of an interpreter and that of a JIT. Hopefully one of the next versions of Android has a JIT.
It takes ~5-10 years to write a good virtual machine with state of the art garbage collectors and optimizers. Sun (and Microsoft) have spent those years. Google hasn’t. Hopefully they will keep investing in it so that one day Android Java code isn’t a 90% slower than it should be.