The message is saying that it is trying to run a program called "Setup.exe" on your main C drive (your Windows drive), but that it is not a valid Windows program.
(A "Win32 application" is a program that runs under the usual versions of Windows XP or Vista).
The program (setup.exe) seems to be on your desktop.
I have seen this message before when you try to run a program from within a directory with a space in the name (in your case "Documents and Settings").
Not sure how you are trying to install it, by try moving the instal code to a directory with no space in the name, like C:\VirtualPC