Well, I can see you are indeed confused.
VMWare is to use with windows host and BT5 as a guest..This means, you have a Windows XP, vista or 7 and install vmware in any of them, hen download the BT5 vmware version to install in your vmware.
ISO is to burn it to a DVD and use it as LiveDVD and Install it on a HDD. Also used in Linux VM installs (Not the same that VMWare, both Virtual machine, but one is free from Oracle and the other $$$$ from VMWare)
As to desktop, in BT5 you have the kde, gnome, it is up to you, which one you prefer.. I use gnome.
VMware have some limitations, one is it cannot handle internal wifi cards..Only USB..It is a virtual machine, so it probably won't be 100% as the real thing. I prefer 1000 times the hdd installs. I do not even like USB or CF installs.
I've used win7 and xp in my linux vm, and it runs quite well, although some app won't run 100%.
But it is up to you...