I'm answering my own question because I finally found the answer so don't want to bother anybody here by taking up valuable time. The answer is (I did what is instructed for Firefox 1.5 and it works)
:
In Firefox 1.0.x the option to allow web sites to install software is found under "Tools -> Options -> Web Features -> Allow web sites to install software". Starting in Firefox 1.5 the option has been removed from the user interface (UI). The software installation option must be enabled to allow installation of themes, extensions and certain plugins that use the XPInstall method.
If you click a web site's "Install" link and you see a message bar that says "Software installation is currently disabled. Click Edit Options... to enable it and try again.",
• Firefox 1.0.x: Click the "Edit Options" button to open the Web Features preferences panel, place a checkmark in front of "Allow web sites to install software" and try again.
• Firefox 1.5: If you previously disabled this option and then updated to Firefox 1.5, the disabled setting will be carried over. Since the option to enable software installation no longer exists in the UI, you will need to use about:config to reset the "xpinstall.enabled" preference to the default "true" value (bug 310737). Here's step by step how to do this: Type about:config to Location Bar and hit enter. Type xpi to filter and find xpinstall.enabled. Make sure it's value is true. (double click will toggle). Now you should be able to install.
(Some users may have disabled the software installation option based on security issues which have since been resolved [1]. To reassure, software cannot be automatically installed without first being granted permission via the "OK, Cancel" installation dialog, which has a two-second delay before you can select "OK".)
Note: Updating of themes and extensions will hang indefinitely, with no user feedback, if software installation is disabled bug 288054.