After downloading and verifying the install, the installer givers this error when I select the installation folder (I tried both default and custom values): (see attached)
Runtime Error at 66:77 The system cannot find the path specified.
I have XP Pro, admin account, and tried it with or without the folder already existing. I have Fallout I,II, and Shogo already installed from GOG, not sure why this one is being difficult.
Any ideas?

Odd... maybe you've got a bad download there and you'll need to try re-downloading it again. Also, try turning off the extra install options like "Create a desktop shortcut" and "Dosbox" (although you need Dosbox to run this, but just to test it). You could also try installing it in Safe Mode, in case you've got some strange software conflict.
EDIT: Just thought of something else... it might not like where the setup file is for some reason. Try moving it somewhere else.

There is always the possibility of the problem, caused by another badly running programme, I had problem like that and total reboot (pushing the Restart button on my computer) and it worked just fine. Maybe you could write down the running programmes in the background, so we can compare which ones could cause this problem?