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You do not need to expand the downloaded archive, although you can and it still should work if you point to the correct local directory. In the Eclipse Available Software Sites dialog select the Add button and then choose the Archive button to point to the download zip archive location on disk. The location should be in the form of something similar to this on Windows -> jar:file:/C:/[path/to/download]/ArcGISAndroidSDK_v2.zip!/ where [path/to/download] is the location on disk where you downloaded the SDK zip file.