It sounds like you have an application preference set wrong. DMGs cannot and should not open with Reader. Right click the DMG and choose "Get Info". Under "Open With" it should show Disk Image Mounter.app.
Hmmm, I don't know why "reader" is trying to open this DMG... is looks like DiskImageMounter.app is set to open it.
Things are getting curiouser and curiouser. When I launch install_flash_player_osx7.dmg by double clicking on it from the downloads folder using finder it installs. It only fails with it is launched via firefox.
That would be a Firefox preference gone awry.
OK, makes sense. Any idea what the DMG preference should be in Firefox?
It was set to "Always Ask"
... and I changed it to "Use MacOS"
The funny thing is that all the other updates (these were Add On updates) that I ran downloaded the DMG file and it started right up. It is only the Adobe products (Acroread, Flash, ect) that are having troubles, and they all get the same error.
BTW - Thanks for helping!
Found /System/Library/CoreServices/DiskImageMounter.app and set the Firefox preferences DMG file to use that now.