Not sure if this problem has already been solved since I've not been here for quite some time but after some tinkering during the weekend I finally was able to fully dist-upgrade the m5v3e image to Squeeze.

There were a lot of failed attempts and reboots involved but I finally succeeded by only upgrading small portions of packages (via debbie and aptitude) of 30-50MB download volume at a time including manual fixes for some broken packages and a final dist-upgrade when almost everything was done.

I did that because I noticed that some applications (e.g. nload, audacity) were silently broken in the Lenny/Squeeze mix and because I don't like mixed systems.

However there are 3 (or 4) problems I've noticed so far:
1. Loading LXDE takes much longer now, maybe twice the time. I guess that's due to increased RAM requirements. So far I have no idea what to do about that. Once started the system seems to run as fast as usual.
2. A pcmanfm window gets started automatically when LXDE is loaded. I guess the autostart got messed up somehow.
3. The keyboard is messed up. Most keys work fine but according to xev the left cursor (qwerty layout) produces Super_R and so on. I guess that can easily be fixed via xmodmap. I didn't even check so far if the existing xmodmaprc is loaded or not.
(4.) The LXDE logout dialogue doesn't show shutdown or reboot anymore. I don't consider that to be a real problem since logout is still present and working and fully sufficient in a chroot.