Most common reason is the local subnet is the same as that of the remote site. i.e. local and remote use something similar such as 192.168.1.x Could also be your Virtual network uses the same.
I haven't used Virtual PC ( I use VMWare - nothing against VPC), but there should be various options as to how the network connection is made. If you used NAT, I don't believe most of the Watchguards support NAT-T for VPN's. You may need to set up a bridged connection so your Virtual XP machine gets a true local LAN IP.