As to why, the product probably uses java, and some of the imaging routines require X11 library calls, and to access these calls requires a connection to an X11 server, thus xvfb.
I think this is fixed in later releases as in 1.4 or 1.4.1 there is a runtime parameter that can be given to java so it knows it is headless. I haven't had the need to test this out as yet, but that is my conclusion when I did some searching the find out why Oracle 9i Application Server needed an X11 display.
My experience with xvfb is with Solaris & Mandrake, so I can't say anything definiitive about SME, however I don't see why it should be bad for your box. Things I would pay attention to are security and resource utilisation.
From the security side, I would try not to install a real X server, just the virtual one, and watch out for any setuid files that may be installed, that you don't really want. I would also run xvfb with '-nolisten tcp' if possible.
From the resouce side, apart from the chunk of space X11 is going the take out of your disk, I'd run it with something like '-screen 0 1x1x8', as this will reduce the memory footprint as much as possible. You may need to adjust the screen setting to your application, tho.
Sm