I recorded a quick video that shows how quickly you can update an ESXi server from 1 version to the other. Before doing this, your host will need to be in maintenance mode, so all of your virtual machines will need to be vmotioned off first, but this procedure should not cause a lot of pain.
Once the server is down, boot it with an ESXi 5 cd and here is what you will see. Notice that I am destroying the local VMFS 3 filesystem, as if you simply upgrade your VMFS to 5 you will miss out on certain features. So if you are storing VM’s locally you will want to keep this in mind and storage vmotion them off prior to doing something like this.
This was recorded in VMWorkstation for demo purposes.