Usually the 'not a valid win 32 application' error is caused by a corrupt file (such as a broken download). Try uninstalling the game, re-boot, shut down all non-essential applications (especially anti-virus programs) and re-install. If that doesn't help, try installing it from a different optical drive, if possible.
If you have problems once you get the program to actually run, there should be an option for Windows 95 (or 98) in the compatibility settings. You set the options for what version of Windows the program is compatible with, and XP can compensate for some differences between Windows versions. Games are usually fairly independent, though, so changes in the registry, etc should not be a problem (compatibility mode would be worth trying, but not likely to help). DirectX is suppose to be backwards compatible, but it is possible for a game written for one version to have problems with a later version.
