There were quite a few missing steps that weren't mentioned, leaving us in the dark. Now it makes sense.
Agreed,
so it's change the file name to update.zip, place ion SD card root, POWER/VOL UP, recovery, wait for red triangle thingy, POWER/VOL UP again. apply sd card:udate.zip (or something like that).
It'll them ask you to reboot via menu (simply hitting the power button should do it)..
Then, waaait for it,, waaait for it,,,
Voila!
Congtadulations! Your phone has been successfully upgraded to 3.26.651.3..
Good luck all..