Many people don’t know this, but the XPI blocking feature in Firefox is also in the Mozilla Application Suite, starting at version 1.7 and up. They just couldn’t get a user interface for it, on time for Mozilla 1.7.
By default, the “Enable Software Installation” setting will not block anything. Simply unchecking it, will turn XPI installing off all together.
To enable software installation, but but only for certain sites, you first need to enter about:config in the browser location bar, then search for the preference xpinstall.whitelist.required, and set it to true.
By default, there is one site on the whitelist: update.mozilla.org. To add a site to the list, use about:config to look for the pref xpinstall.whitelist.add, double click on it (or right-click on it, and select ‘Modify’). Set the value to the domain you want to add. For example: ilias.ca
To remove an entry from the whilelist, you’ll have to close down Mozilla, go to your profile folder, and manually remove the entry from the file hostperm.1.