iDOL - If going the virtual way, do make sure your HDD is >4Gb in size - otherwise logrotation won't work.
But it is possible & do work.
EDIT : if you only want a basic Smoothwall, 4Gb HDD will be fine.
However, if you want to add on extra modules and so on, you'll need to look at a bigger virtual disk as Smoothwall logs everything. If one log cannot be rotated due to lack of space, it will cascade throughout the system, and you'll get a full HDD. Happened to me once before.
A rough rule of thumb is a gig of HDD space for every module added. YMMV though.