After I upgraded to Firebug 1.4, I could no longer debug Javascript from pages served by my local development server. I got the message "The resource from this URL is not text" on the script tab for each file. However, I could successfully debug Javascript on pages served by the production server.
So I went back to Firebug 1.3.3 thinking that this was just a Firebug bug that they'll fix soon. When Firefox 3.5 was released, I had to go up to 1.4 again, since Firebug 1.3 is not compatible with Firefox 3.5. To my disappointment, Firebug was still displaying this error.
After looking in to this error more, I found out that it's because Webrick serves javascript files with a mime type of application/octet-stream. This is causing Firebug to think that it can't read the files. Webrick should probably be fixed to serve Javascript files as text. Firebug should definitely be fixed to read javascript files, since it did in previous versions and Firefox still reads the files fine. However, it doesn't look like they're going to fix Firebug.
So, what's the solution? Run mongrel instead of webrick. Mongrel serves javascript files with a valid mime type. Just do a "gem install mongrel", and mongrel will load up instead of webrick.