I ran into this error – “setup.exe is not a valid win32 application” the other day while I was trying to upgrade cygwin (1.5 -> 1.7) on an old laptop.
Underlying problem was that I was upgrading under a different account than had been used to originally install cygwin. Switching to that account and running the upgrade was an effective workaround. (Ineffective attempted workarounds included re-downloading several times, explicitly running as administrator, swearing, and banging on the desk).
So: in case anyone else gets bitten by it, try that.
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