IE 8 is not feasible for /anyone/ since it hasn't been released yet.

Carefully following the information below will result in a successful
install:

http://www.ie-vista.com/known_issues.html#pre-install.

Download the IE 7 installer from Microsoft and install directly from
your hard disk:
http://www.microsoft.com/windows/downloads/ie/getitnow.mspx

This frequently works better than going through Microsoft/Windows Update.

Of course, the usual caveat applies whenever you upgrade an operating
system: Do not upgrade an OS with problems. Solve the problems first,
then upgrade.
---
Leonard Grey
Errare humanum est

Is SP2 installed?  It's required.
In fact, I'd install SP3 first.  Otherwise you have to uninstall SP3 to go
back to IE6.

Hello Drew,

It's almost certain that the system did not have enough space to complete
the download of IE7-file.  It got chopped, and led to the error you are
getting.

How much free space does this have?  If you're using IE to download, you
effectively need double the size of the file you download, as free space, so
that the full download succeeds.
Your downloaded file almost certainly got truncated and thus you are getting
the error "not valid win32 app".

If your system supports a USB flash drive, shift your download to a folder
on a flash drive, or any other media with the sufficient free space. Then,
with sufficient free space on your system, you can install IE7.
Caveat: If this has XP service pack 2, you should really have XP service
pack 3 installed, before adding IE7.

So the general advice is:  Clean your system of un-needed files, and delete
the file you'd downloaded before.
Free up space on your HD.