vCenter Server and the update manager both have been upgraded to vsphere 5. Now, the only task is to move to esxi 5.0 U2 since that is the furthest that is supported per HCL.
Thanks for the link. So, my final steps would be
1. Enter host 1 into maintenance mode.
2. Take host 1 out of cluster and shut it down.
3. Detach iSCSI network cables from the host
4. Boot the host from the installer CD. Follow the instructions for installation and chose "overwrite vmfs datastore" option.
5. Reboot once install completes
6. Connect the host to vcenter server and join it to the cluster (network drivers may need to be installed before configuring network?)
7. scan for storage
8. Use update manager to apply all the patches.
Repeat the same for all the hosts. Once every host is esxi 5.0 U2 version, upgrade the vmware tools first and then the hardware version.