Michael,
We have the exact same setup as you: seperate SQL 2008 server, vCenter 4.1, both vm's.
I tried upgrading in place and it failed. My Virtual center service wont start.
I hasd to revert back to my snaps and start over.
So far I haven't had any luck.
I also tried uninstalling vCenter completely from my VC Server (which is also 2008 r2). Installing vCenter 5 from scratch. Still fails although it says Finished.
Again my VC service doesnt start.
Have you had any luck with your upgrade?