Moodle does run in a virtual machine. My college is running their moodle install in vmware. It works just fine. In my work with vmware, the performance does not suffer as great and hardware downtime no longer exists when everything is configured properly.
I have made and released moodle 1.8.4 running in a vmware server.
Gnome 2.x (for those who need a gui)
webmin(lightweight web admin interface)
If you would like more details please message me via the boards.