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I'm not clear about the steps to follow. I've created a Win7 guest machine and downloaded the Guest Additions update iso.
Do I follow the built-in procedure to install the Guest Additions and then somehow run the update after that? Or does the update replace the built-in Guest Additions? If so, how do I use it?

There are no 'build-in' Guest Additions. And no need to manually download the GA ISO either, it's shipped with the installer. Once the VM is installed and booted, you eject any loaded ISO or disk from the VM through the Devices menu, then click on Devices > Install Guest Additions. This will load the GA ISO and Windows should come up with an auto-run option. Let it run the installer, follow the on-screen instructions and done.

Thanks. Because there was the "update" on the download page right next to the 4.02 download, I didn't realize that the Guest Additions that came with 4.02 were current.

Yes there is an update and it is the full 4.0.2 GAs but with the fix for display issues in Linux (if you have them)
You mount the updated iso in the CD/DVD and then run them (in the guest)