I did the following to install Ruby on Rails on Windows XP:
I've had this problem when installing the mysql gem before, and a quick fix is just to copy the libmysql.dll into your ruby bin folder. I recently got rails running off of a WAMP MySQL server without a problem, so if this doesn't solve it post a more specific error message once you've sorted out the dependency issue and I'll look at my configuration.
EDIT: Just to be specific, I'm running XAMPP.