This is a minor upgrade to ESX. It applies to any ESX release running VMFS3 (ESX 3.x). If you are upgrading to this release from VMFS2 (ESX 2.x), that’s a different story (see the upgrade guide [vmware.com]). Also, there is multiple ways you could do some of these steps, e.g. could use esxupdate for the hosts or Update Manager for VMware Tools, etc) – either way, the order is important:

1. Upgrade the Virtual Center server first – this is to apply the updates to the database, update manager, new VI client, etc

2. Upgrade the ESX hosts second – if the hosts are in a cluster, simply VMotion all the guests off the host (or send it into Maintenance Mode and let DRS do it if you have it setup fully automated), mount the upgrade image to the server (either CD, or remote console, etc). Reboot the server and boot from the upgrade image, select pretty much every default (it will detect the existing install and default to upgrading it). Once it’s finished, restart the server, check everything starts ok.

3. Upgrade VMware Tools on the guests last – an upgraded version of VMware Tools is included in U4, the guests will detect the upgrade and will eventually need to have it installed. There’s no rush, VC will just note that VMware Tools is ‘out of date’ until it updates and the system tray icon will have a warning icon. This upgrade includes a few virtual hardware updates.

ESX 3.5 U4 release notes [vmware.com]