JM,
The reason I thought you might know more about MySQL than I is because of your statement in your previous post, which you have re-affirmed in this one, that you had created a database before starting the installation of Moodle. I don't know what you mean by you did not create a database on Moodle before the installation.
Anyway, the bottom line is, it looks like you are using a version of Moodle intended to be used on Windows workstations (like yours and mine; I too have a Dell with Windows XP) for testing and practice purposes (like xampplite), on your webserver. That, I think, is your main problem. I don't know how you created the database on the server before installing Moodle. As I said before, maybe you had MySQL software on the server before you installed xampplite, which comes with its own version of MySQL. Maybe the two MySQL servers are interfering with each other. Until we get all that cleared up, I don't see how I can help you with it.
As for whether it would be better to install (or at least download and unzip) Moodle on your workstation first and then upload to the server, I prefer to avoid that because it involves more downloading and uploading than necessary. As long as you are able to unzip on the server (which you have obviously done), I would say no, you don't need to do that.
If you intend to install Moodle on your webserver for production use, then I think you have the wrong version of Moodle for that purpose. To proceed further, it would be necessary to know more about your webserver, like what operating system it runs, the MySQL software, etc.
RLE
PS I did complete my xampplite Moodle installation on my PC, btw. I don't know how it managed to create the database when, as far as I could tell, the MySQL server was not running, but it evidently did, because my Moodle is working. Which is why I am puzzled by the fact that your Moodle installation has such a problem doing that, and why I suspect you have multiple copies of different kinds of MySQL servers on your web server interfering with each other.