I had 2 hosts on 3.5 update 3, and I was making the move to 5.1 this year. I took the approach of upgrading from 3.5 to 4.1, then 4.1 to 5.1. The upgrade from 3.5 to 4.1 went perfect. However the upgrade from 4.1 to 5.1 corrupted 2 of my VMs. My advice to you would be to backup the vmdk files for your vms, or move them off the host before you upgrade it then run the upgrade. This should allow you to safely upgrade to 5.1 without losing anything. If you backup the vm from the vmware side it is an easy restore if something does happen. Unfortunately for myself I was backing everything up within the guest, so I spent the last week restoring servers and much unneeded downtime.
Good Luck!
