Yes you are right! Localization update copy translated JARs to Kindle and backup original. Uninstaller copy backup files back. If you need to update Kindle to 3.0.4 you must first uninstall localization update and apply 3.0.4 firmware update.
P.S. New localization update (0.05) will patch files on-board (on Kindle) so it can be applied to any firmware (K3 of course).