Follow the instructions on the screen to install the drivers with the device still plugged in. On the window that appears, click on the folder that says "Driver", and then click on the "setup.exe" application file to install the drivers for the VC500. Note that according to Diamond the VC500 should be plugged in before installing drivers.
To install drivers, load the installation disc into your computer's CD/DVD drive and select the "Open folder to view files using Windows Explorer" option from the Window that pops up on your screen. If the drivers are installed, the device should appear under "Sound, Video, and Game Controllers" as "USB2.0 Video Capture Device" and "USB2.0 Audio Capture Device". (If there is a yellow triangle with an exclamation point beside "OTG102" that is normal when the drivers are not installed.) According to Diamond, the VC500 is supposed to show up as "OTG102" under either "Sound, Video, and Game Controllers", or "Other Devices" if its drivers are not installed. Plug the VC500 into a USB port and open Device Manager. You should check to see that the device drivers are installed correctly.
I'm going to assume the LEDs are in reversed on your VC500 and the device is receiving power. When I tried to find out why you might see the red LED light up when the device was not recording, I found some user reviews indicating that the LEDs are sometimes reversed.
Diamond's website indicated that the power LED was blue, but the record LED was red, and blinks while the device is recording.