When I attempted to install the Web Developer Add-on in Firefox I was presented with the error in the title of this post.
After some searching it seems that the least intrusive way to go about fixing it is to update the Firefox configuration for your user profile.
If you are on WinXP look in C:\Documents and Settings\UID\Application Data\Mozilla\Firefox\Profiles\fxlme5ka.default. On my install the following preference was in prefs.js
Change:
user_pref(“xpinstall.enabled”, false);
to:
user_pref(“xpinstall.enabled”, true);
Save the file and restart Firefox.