Unfortunately, if Woody can't work his magic, there's not much else to try - he's the guru. The best thing you can do at this point is probably to give him the old virtual machine to use - at least he's only lost 4 months of data.
I wouldn't hold my breath running Data Rescue 3 on a time machine backup. You're going to end up with literally millions of files (mostly fragments) - finding an intact virtual disk is beyond a needle in a haystack.
His original logic doesn't make much sense btw - Time Machine will automatically prune backups to free up space (which is part of the problem with using it to backup VM's).
It's a painful lesson, but an important one. Time Machine isn't remotely reliable for virtual machines (and in my experience, it's not reliable for full recovers anyway - the backups are far too easy to silently corrupt, and don't backup the entire machine). Maintaining a good clone with a program like Carbon Copy Cloner or SuperDuper is the most reliable method of backing up a Mac (just make sure the VM's are shut down - not suspended - before running a clone).
Going foward, for critical files, the safest thing is to write them to the mac directly via the shared folders in windows, rather than saving them inside the virtual machine. At least that way if there is a recovery process needed, you're not fighting through the virtual disk to get the information. That might also shrink the VM size (unless the 80GB is full of snapshots).
One other thought: Losing a virtual disk from a crashing VM is unusual - it's more commonly the other way around. It'd be worth checking the physical disk to make sure that it's not failing.