You can go with the default Host Upgrade Using the Upgrade utilities, vCentre Update Manager (VUM) or vSphere Host Update Utility (vHUU). It will do the inplace host upgrade from 3.5 to 4.0.
vHUU is a freeware, you can install it along with the vSphere Client 4.0. Once you install vHUU add the 3.5 host to it for upgrade.
Start upgrade procedure with the "Upgrade wizard" in vHUU. The steps are clear and streight forward. In between , the wizard will ask for you to choose the VMFS datastore for COS vmdk.
In your case, choose the VMFS data store whic's in SAN.
Before vHUU starts the upgrade, it will do a host compatibility check to make sure that the host is compatible for upgrade.
The detailed steps for 3.5 to ESX4.0 upgrade are available in vSphere 4.0 Upgrade guide.
http://www.vmware.com/pdf/vsphere4/r40/vsp_40_upgrade_guide.pdf
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Regards,
Sreejesh