no need to extract anything from update.img.
unzip everything to sd card, be sure to keep directory structure (update.img must be in OS Firmware folder!!)
then: insert sd card into reader
finally: follow steps 1.)-7.)
step 3.) will make the reader boot from sd card and run the recovery procedure.
Be sure to check out the Wiki for Sony PRS-T1 Rooting and Tweaks!
Many questions are answered there already... If not - feel free to add
Some modifications will void warranty and may irreversibly destroy the device. I won't take responsibility if you damage your reader by using one of my files or following my suggestions.