The best thing would be make sure that the right script is running for the XAMPP install. Also, is XAMPP 1.8.1 a beta program? Did you have any success using XAMPP 1.7.1 to install WP 3.4.2? Those would be the different things that I would try.
Since you are on windows, there is an alternative that you can use to XAMPP which is WAMP. I am not sure if it works on a USB drive but it is another server you can use for local development.