I believe some Google Apps would be on /system. Sounds like you may have deleted one folder too many out of the update.zip.
In the download page there is a link for gapps.zip. Tried downloading that, renaming it to update.zip and installing. Well it gave me an error saying installation aborted.
Flomaster I would like to stay with sprecovery for now. That is the reason I am trying this method.
To me, the method seems convoluted and more work than needed, imo. All you need is sprecovery image sitting on your sd card.
Make your sprecovry backup, simply install ROM Manager, flash clockwork, download/install the ROM (include google apps), then when it boots back up use the included terminal app:
Code:su flash_image recovery /sdcard/recovery-0.99.3.img
No renaming, no aborts, etc. wtc. Mind you, change the recovery image name to whichever you have.