You know how you spend an afternoon (or a day or ...) trying to figure out why some fershlugginer piece of technology ought to work but won't? The web has been a godsend for those days since you can often find your problem or something much like it, along with a solution (or at least an approach). But every now and then can't find what you're looking for, so if you DO figure it out posting it is A Nice Idea. This page is my repository for such problems/solutions in the hopes of saving some other poor soul a frustrating afternoon.
December 2012: I ran into this one trying to install an Epson WP-4530printer, but the problem is probably not unique to Epson. I was installing said printer on my Vista Ultimate 32-bit system and things were going swimmingly until I attempted to install the driver, whereupon I was informed that "Windows can't install the Epson WP-4530 series kernel-mode print driver". Hmmm, try again ... same result. Okay, hit the Epson website, download the latest drivers, try again ... no dice.
After a few more fruitless attempts and an unsatisfactory chat with Epson tech support (in which they told me to call Microsoft because it was their problem), I had a much more useful exchange with a second Epson support technician who pointed me in the right direction.
Here's the problem: In the olden days, when the Earth was young and all, printer drivers (and pretty much all other drivers) were written to run in kernel mode, where they rubbed bits with the operating system on a regular basis. This worked fine until a printer driver bug (e.g., a buffer overflow) cropped up and cheerfully wrote on parts of kernel memory where it oughtn't, typically doing horrible things to your operating system and leading to an unceremonious crash. Tiring of being blamed for other vendor's problems, around 2006 Microsoft sensibly moved to a user-mode driver model in which the driver is encapsulated in such a way that it can crash itself, but not the rest of the system. Good plan! To help move matters along, Windows began to disallow the installation of kernel-mode printer drivers. Which means if you DO try to install such a driver, you'll see the sad error message above. For whatever reason, Epson hasn't seen fit to bring its driver into the 21st century (at least for this printer), and so it looked like I was toast. But wait -- all was not lost!
Here's the workaround. The system behavior toward kernel-mode drivers is not hard-wired into the system, but is controlled by a Group Policy Object. If you really want to install a kernel mode driver, you can modify the policy to allow it. (Realize, of course, that if you have a buggy kernel mode driver it can still cause system instability and/or crashes ... ah, the price of regress (er, progress).
And that's it. You can now install your kernel-mode printer driver ... and hope it was debugged well by the manufacturer!