It doesn't really matter where you install LILO. But you must follow the instructions step by step on installing the OS in VMWare, especially when you get to video configuration. It is not easy, I've learned. I had to install it about 3-4 times to get it right.
Yes, the VM has a MBR. It emulates a physical machine so it has pretty much everything a physical machine will have. I installed LILO to the MBR and it works fine, but if you don't follow their install instructions to a T, it won't work. It is very picky. I would suggest trying again, even though that isn't quite what you want to hear.