You should always run the setup command from the distribution root directory, i.e. the top-level subdirectory that the module source distribution unpacks into. For example, if you've just downloaded a module source distribution foo-1.0.tar.gz onto a Unix system, the normal thing to do is:
gunzip -c foo-1.0.tar.gz | tar xf - # unpacks into directory foo-1.0 cd foo-1.0 python setup.py install
On Windows, you'd probably download foo-1.0.zip. If you downloaded the archive file to C:\Temp, then it would unpack into C:\Temp\foo-1.0; you can use either a GUI archive manipulator (such as WinZip) or a command-line tool (such as unzip or pkunzip) to unpack the archive. Then, open a command prompt window (``DOS box''), and run:
cd c:\Temp\foo-1.0 python setup.py install
On Mac OS, you have to go through a bit more effort to supply command-line arguments to the setup script:
python setup.py
and you'll be fine)