Question: I have a few questions corresponding to this. 

1. What is M2\_REPO?
2. What does this command do?

`mvn -Declipse.workspace=<your_workspace_location> eclipse:add-maven-repo`
3. Why do we need to do the above?

Answer: 
1. M2\_REPO is a variable that defines where maven 2 repository is on your disk
2. This means: add definition of M2\_REPO to XML file that defines the eclipse workspace
3. You can do the same manually if you want. That is what I personally did. Just go to Window/Preferences and then choose Java/Build Path/Classpath Variables. Once you did it you can enjoy maven integration with eclipse. Every time you add new dependency to your pom.xml, run 

mvn eclipse:eclipse

and refresh you workspace you get all new libraries into classpath of your project.

EDIT

This answer was written 5 years ago. These days any eclipse distribution has maven plugin, so eclipse can open maven project directly. Every dependency you add to your pom.xml is automatically downloaded and almost immediately ready to use.
Go to Windows-> Preference -> Java ->Build Path -> Classpath Variables -> New and add the following ;

Name = M2\_REPO (or what ever name you gave for your Maven repository)
Path = C:\Users\Administrator.m2\repository (Mine is saved here)