Hi, You are correct the Virtual Machines will work on VMFS-5 if copied across. There should be no converting as such. You will have the option of upgrading the hardware version to vmx-9. This is a manual task. If you plan to move the Virtual Machines back to the vSphere 4 hosts don't upgrade because the hardware version will not be compatible. You will need to stay on hardware version 7 which is compatible with all your flavours of vSphere.
You are also correct in going down the route of emptying each datastore and recreating as VMFS-5 rather than an upgrade from VMFS-3. That is the way I did it. I was lucky enough to have Storage vMotion but the principle is the same.
I suppose the big question around VMFS-3 and VMFS-5 on your hosts is around your strategy for the other two hosts.
Do you plan to upgrade these hosts to vSphere 5.1 as well? If you are I would put them all on VMFS-5 as you upgrade since that will give you consistent standard deployment. If you don't plan to it might be worth keeping them all on VMFS-3 so you know your datastores are standard across the hosts and if you have issues down the line it is one less variable to worry about.
Hope this helps.
Steven