oh yeah forgot about that too lol.

C:\xampp\data\

and elgg path should be 

C:\xampp\htdocs\

Hey Steve,

On production server I have my Data folder inside the web root. is this an security issue . If yes can you please let me know how t move data directory outside the Webroot without losing any data.. Thanks in advance for your help !!!!

You can move the directory outside the root. See http://docs.elgg.org/wiki/DuplicateInstallation