That means that all history and cookie settings have the default value, so that should be OK.

Choosing the "Use custom settings for history" setting doesn't make any changes to history and cookie settings.
Firefox shows the "Use custom settings for history" setting as an indication that at least one of the history and cookie settings is not the default to make you aware that changes were made.
If all History settings are default then the custom settings are hidden and you see "Firefox will: (Never) Remember History".
Never Remember History" means that Private Browsing is active and "Always use private browsing mode" gets a check mark.

Cor-el, Thanks for the info. I'm trying to download SocialMonkee.com and I get an error message that says SocialMonkee could not be installed because FF could not modify the needed file. I had SM previously and lost it when I upgraded to version 8 and now I'm attempting to reinstall. SM said I need to enable cookies and that's how I ended up in the Privacy section with these questions. Any help would be appreciated. thanks, tande

Try to set the Boolean pref extensions.alwaysUnpack to true on the about:config page.

To open the about:config page, type about:config in the location (address) bar and press the "Enter" key, just like you type the url of a website to open a website.
If you see a warning then you can confirm that you want to access that page.

• Use the Filter bar at to top of the about:config page to locate a preference more easily.
• Preferences that have been modified show as bold (user set).
• Preferences can be reset to the default via the right-click context menu if they are user set
• Preferences can be changed via the right-click context menu: Modify (String or Integer) or Toggle (Boolean)