After I finally found some time and good reason to look into this issue a bit deeper I'll elaborate a bit on Thornbjorn's answer.
As of lately, Google changed the way your Android projects package your external Android libraries. In ADT R17 (I think) it started packaging the external projects source into .jar files and including them directly into your project in the Android Dependencies or /libs folder.
Now, when the debugger hits a breakpoint, it brings up your source code in the .jar, essentially telling you to edit a .class file. The problem is that this file is read-only and so you have to go find your .java source manually. (Pain)
The fix is to right click the Project name in the debug view, and select "Edit Source Lookup..." from the menu. From there, remove the Default lookup path. After that, manually add the associated projects (not jars) that your project references. This is done by clicking Add, selecting Java Project, then checking the appropriate projects.