diff --git includes/common.inc includes/common.inc
index 82e44b5..f0cb1d8 100644
--- includes/common.inc
+++ includes/common.inc
@@ -6773,6 +6773,27 @@ function archiver_get_info() {
 }
 
 /**
+ * Returns a string of supported archive extensions.
+ * 
+ * @return
+ *   A space-separated string of extensions suitable for use by the file
+ *   validation system.
+ */
+function archiver_get_extensions() {
+  $valid_extensions = array();
+  foreach (archiver_get_info() as $archive) {
+    foreach ($archive['extensions'] as $extension) {
+      foreach (explode('.', $extension) as $part) {
+        if (!in_array($part, $valid_extensions)) {
+          $valid_extensions[] = $part;
+        }
+      }
+    }
+  }
+  return implode(' ', $valid_extensions);
+}
+
+/**
  * Create the appropriate archiver for the specified file.
  *
  * @param $file
diff --git modules/update/update.manager.inc modules/update/update.manager.inc
index 7c437b9..03e14d0 100644
--- modules/update/update.manager.inc
+++ modules/update/update.manager.inc
@@ -457,17 +457,9 @@ function update_manager_update_ready_form_submit($form, &$form_state) {
 function update_manager_install_form($form, &$form_state, $context) {
   $form = array();
 
-  // Collect all the supported archive file extensions for the UI text.
-  $extensions = array();
-  $archiver_info = archiver_get_info();
-  foreach ($archiver_info as $info) {
-    if (!empty($info['extensions'])) {
-      $extensions += $info['extensions'];
-    }
-  }
   $form['help_text'] = array(
     '#prefix' => '<p>',
-    '#markup' => t('To install a new module or theme, either enter the URL of an archive file you wish to install, or upload the archive file that you have downloaded. You can find <a href="@module_url">modules</a> and <a href="@theme_url">themes</a> at <a href="@drupal_org_url">http://drupal.org</a>. The following archive extensions are supported: %extensions', array('@module_url' => 'http://drupal.org/project/modules', '@theme_url' => 'http://drupal.org/project/themes', '@drupal_org_url' => 'http://drupal.org', '%extensions' => implode(', ', $extensions))),
+    '#markup' => t('To install a new module or theme, either enter the URL of an archive file you wish to install, or upload the archive file that you have downloaded. You can find <a href="@module_url">modules</a> and <a href="@theme_url">themes</a> at <a href="@drupal_org_url">http://drupal.org</a>.<br/>The following archive extensions are supported: %extensions.', array('@module_url' => 'http://drupal.org/project/modules', '@theme_url' => 'http://drupal.org/project/themes', '@drupal_org_url' => 'http://drupal.org', '%extensions' => archiver_get_extensions())),
     '#suffix' => '</p>',
   );
 
@@ -538,10 +530,14 @@ function update_manager_install_form_submit($form, &$form_state) {
     }
   }
   elseif ($_FILES['files']['name']['project_upload']) {
+    $validators = array('file_validate_extensions' => array(archiver_get_extensions()));
     $field = 'project_upload';
-    // @todo: add some validators here.
-    $finfo = file_save_upload($field, array(), NULL, FILE_EXISTS_REPLACE);
-    // @todo: find out if the module is already instealled, if so, throw an error.
+    if (!($finfo = file_save_upload($field, $validators, NULL, FILE_EXISTS_REPLACE))) {
+      // Failed to upload the file. file_save_upload() calls form_set_error() on
+      // failure.
+      return;
+    }
+    // @todo: find out if the module is already installed, if so, throw an error.
     $local_cache = $finfo->uri;
   }
 
diff --git modules/update/update.test modules/update/update.test
index fdb2d67..16bfb9a 100644
--- modules/update/update.test
+++ modules/update/update.test
@@ -493,3 +493,49 @@ class UpdateTestContribCase extends UpdateTestHelper {
 
 }
 
+class UpdateTestInstallCase extends UpdateTestHelper {
+  public static function getInfo() {
+    return array(
+      'name' => 'Install new module functionality',
+      'description' => 'Tests the update module's ability to install new modules.',
+      'group' => 'Update',
+    );
+  }
+
+  public function setup() {
+    parent::setUp('update');
+    variable_set('allow_authorize_operations', TRUE);
+    $admin_user = $this->drupalCreateUser(array('administer software updates', 'administer site configuration'));
+    $this->drupalLogin($admin_user);
+  }
+
+  /**
+   * Test that we can add a new module from a local file.
+   */
+  public function testInstallNewLocalModule() {
+    // Images are not valid archives, so get one and try to install it.
+    $invalidArchiveFile = reset($this->drupalGetTestFiles('image'));
+    $edit = array(
+      'files[project_upload]' => $invalidArchiveFile->uri,
+    );
+    $this->drupalPost('admin/modules/install', $edit, t('Install'));
+    $this->assertText(t('Only files with the following extensions are allowed: @archive_extensions.', array('@archive_extensions' => archiver_get_extensions())),'Invalid archives are not allowed.');
+
+    // Try to install a valid archive, for an existing module.
+    $validArchiveFile = drupal_get_path('module', 'update') . '/tests/aaa_update_test.tar.gz';
+    $edit = array(
+      'files[project_upload]' => $validArchiveFile,
+    );
+    $this->drupalPost('admin/modules/install', $edit, t('Install'));
+    $this->assertText(t('@module_name is already installed.', array('@module_name' => 'AAA Update test')), 'Existing module was not reinstalled.');
+
+    // Try to install a valid archive, valid module.
+    $validArchiveFile = drupal_get_path('module', 'update') . '/tests/ddd_update_test.tar.gz';
+    $edit = array(
+      'files[project_upload]' => $validArchiveFile,
+    );
+    $this->drupalPost('admin/modules/install', $edit, t('Install'));
+    $this->assertText(t('To continue, provide your server connection details'), 'Authorize.php prompts for security credentials');
+  }
+}
+