The supported upgrade process for any Version is part of the product release notes, which are available in the Wyse self-service Portal Knowledgebase..
WSM 7 supports Upgrades from 6.x Version only.
To upgrade from Version 5, you first have to upgrade to Version 6 and then to Version 7.
Everytime the OS Image is patched, all write cache files will be discarded because their (parent) Image is altered. This is like with snapshots in for storage world.
Thus it is recommended to not store any user specific data or settings "on the device" (which is the write Cache) but use Folder redirection, roaming profiles etc. to store them seperately on a file Server for example.
In your scenariou, cou can upgrade the Server side from Version 5 to 7 and leave the OS Image on Version 5 for now, given you are not using Application Streaming today or want to use going forward. Anyway, it is recommended that Version of OS Image and Server side do match.