You get that error because the game or at least it installer is 16-bit. 64-bit versions of windows have done away with 16 bit backwards computability.
You would need to use a VM(to install an old version of windows on to. Virtual Box works well enough) or install an older(or maybe even just the 32 bit version would work) version of windows on your computer.
If the game works in DOS, you can use dosbox, but i think it was windows only.
LOL. Small world. Just trying to do this myself. (Install Dune 2k on Win7 x64.) Same problem.
Solution I'm attempting now is downloading the game (a whole 64mb I believe) from a site that was linked on another thread on another site regarding this problem. I'd link here, but I'm sure there's rules against linking to potentially pirated copies.
Before I get insta-banned for even talking about it, happy to post a picture of my game CD. Or link to other thread.
That's my solution at the moment.
EDIT: Confirmed. I'm up and running. One solution has been the "Install on x86 system, copy all files to x64 system, fix registry." When I did the install, it looked like it was just unzipping an archive with all the relevant files (so basically, someone else did step 1 regarding the x86 system for me/others and packed them for easy unzip on x64 system). Don't know if it dropped the reg. keys that are needed, but the game does work.