you don't need to edit the img file at all..
you just dd it to a partition whether it is on the internal emmc or on your sdcard , later Xephyr needs to be configured to provide an easy debian like usage for this .

If you want to install this to the internal emmc , that's quite easy , it's basically the same as installing any OS to your internal emmc .

install backup menu , connect your n900 to pc , press "w"
then wait ~15 seconds , all partitions on the emmc and the sdcard should appear on your pc as mass storage device .
unmount all partitions if your distribution automatically mounts them .
then fire up gparted . select the 27 GB device (emmc)
right click on the first partition and click shrink , shrink it about 7GB then move the second partition (the ext3 /home partition) to the left and expand it more ex. to 3GB if you want , this gives you more space to install apps in maemo .
now move the swap partition also to the left .
all free space should be on the right .
right click on the free space and click new partition .
I recommend creating an extended partition here as you can have only 4 primary partitions .
inside that extended partition create any other partitions you might want .
for the purpose of installing BT , just create one ext2 partition inside .
click apply .
if you followed what I said it should be /dev/sdb5
exit gparted.
now extract the image , then dd the image to /dev/sd5 :
open a terminal , cd to where you downloaded the image.

gzip -d ./bt5.img.gz
sudo e2fsck -y ./bt5.img
sudo dd if=./bt5.img of=/dev/sdb5
# wait for a long while : 5-15 min maybe more , you can get #progress indication with pv or bar .
sudo e2fsck -y /dev/sdb5
sudo resize2fs /dev/sdb5

disconnect your n900 from pc , and reboot it .
in maemo :
root
mkdir /mnt/bt5
mount /dev/mmcblk0p5 /mnt/bt5

to chroot :

chroot /mnt/bt5

now wait for Qole to finish his scripts to give you easy BT5 !