I think I'll throw in on this and back up Mitchel's response (while acknowledging the other responses -- yes, Virtualization *can* be a problem if it isn't done correctly).
Here are a couple threads from quite a while back talking about Virtualization: here and here (also referenced from the first link).
In a nutshell I work for a large credit union and in the past few years we have worked on virtualizing, well, virtually everything. There are a couple of reasons behind this but it can be summed up in a few: 1) "easy" disaster recovery; 2) fully utilizing our server's abilities; 3) easy upgrades. Now of course these are contingent upon a few other things such as backups, resources, and knowledge. Our IT staff is quite competent and does an excellent job of maintaining our virtual servers. At the time of writing my first thread we were running on somewhere around 10 blades I think... now we have doubled that including putting a very fast SAN behind it all and hosting the VM images from the SAN. That means we can easily move the VM images from one cluster to another (we actually just moved our DNN VM from the older cluster to a newer set of blazing fast servers).
Virtualization can be a great thing but it has to be done right. You can't have Joe Blow setting it up and thinking they are doing a good job. There is a lot involved and things work a little differently on a VM than a physical server. That is probably why some people say that physical is better -- it is "easier" to set up because there are less caveats involved. On the other hand, if you have a competent staff that is well trained in the way virtualization works, they can get a very good setup.
Just to solidify that; we recently upgraded to Exchange 2007 (or 2008, whatever is the latest and greatest). Microsoft really didn't want to see it virtualized, even said it couldn't be done... but our IT staff did the research, talked with other companies that have performed it, and we now have a virtualized Exchange server that works *quite* well. Additionally running several virtualized SQL servers, web servers, application servers, etc.
Again, I'll acknowledge that an underpowered VM probably won't run DNN very well. I can't say that I have experience with that because luckily I can just say "I want more resources" and the IT guys will give it to me.
Good luck.
Good luck with your virtual server.