Cannot enable iSCSI port binding without adding a physical NIC to the vSwitch

Those errors refer to vmhba1 which is not the iSCSI Software initiator, that will be something like vmhba32 or higher. The particular errors you are seeing are likely to be related to this VMware kb article they refer to a path to a storage volume that cannot be used for VMFS partitions. These errors can be safely ignored.

As to your specific problem my guess is that you haven't added a Service Console port on the 3.5 host to the iSCSI network. With ESX 4 the Service Console connection is not required but it was necessary under ESX 3.5. You can check connectivity between the host and your array by using vmkping (to test the iSCSI vmKernel port can reach the arrays ports) and ping (to test that the Service Console can reach the array's ports).

It is possible that you haven't correctly modified the access controls on the Equallogic Volumes to grant access to them from the new initiator but seeing as you have two working ESX 4 hosts that can see the volume(s) I think this is far less likely.

Not the answer you want to hear but we've had so many problems with distributed switches, even with 4.1, that we don't use them at all, let alone for iSCSI. As for benefits, none leap to mind.