Create the SD Card...
Let's create a 64MB sd card for our Android emulator, shall we?
Linux
From a terminal...
# cd ~/android-sdk-linux/tools
# ./mksdcard 64M ~/Desktop/sdcard.iso
Windows XP
From a DOS prompt...
cd C:\Program Files\android-sdk-windows\tools
mksdcard 64M c:\documents and settings\tyler\desktop\sdcard.iso
Now you can use the 'Eclipse Android SDK and AVD Manager' to create a new android virtual device that can use the path to the sd card you created.