Not necessarily saying it's not needed... but android is linux based and, as such, the traditional "virus" doesn't affect it in the same way as it would a pc. Each process is seperate (as if running in it's own bubble) and so, if one was infected, it wouldn't spread.
I think that Lookout can identidy malwear, by comparing what you download to database, which is why it runs a scheduled check of your phone. I think it also looks at permissions for apps when you download them, to make sure that apps aren't asking for things that it shouldn't be... but I do that myself, when I want to download a new app - we should all be looking at permissions anyway (like... why would a simple game need access to your personal data)... Lookout is there as a safety net.
Lookout also has some pretty nice features that are supposed to be part of HTC's Sense (but I never had the webiste working properly and now don't use their ROM, so it's a good replacement)!