We had the same problem - turns out it was because we were using PCI parallel cards. The altera install sets LPT1 as the port, and parport.sys as the port driver for the byteblaster. It does this via the registry entry:
HKEY_LOCAL_MACHINE/SYSTEM/ControlSet001/Services/AlteraByteBlaster/ DependOnService ..... on installation this is set to 'parport', which is what points Quartus to the port driver parport.sys.
If you install a PCI card it will need the manufacturer's driver installed. This willl be placed in c:/WINDOWS/system32 by the card install software, but Quartus does not know about this - so it can't use it (yet)and you get the error "Kernel Mode Driver not installed"
The card we used (by SWEEX) had a driver PciPPorts.sys for the parallel port, other examples use NMpar.sys - you will need to look in your card install folder, or through system32, to find the name of the driver for your card.
It is then simply a matter of editing the registry entry to change parport to whatever the driver name is.... in our case we changed the registry entry from 'parport' to 'PciPPorts' , restart WINDOWS, and all was well.
Worth pointing out we are using XP.