to update to iOS5, simply plug your iPhone or iPad to your MAC or PC. Once iTunes is up and running, it should tell you that an updated iOS is available, namely iOS5. However, I believe you should also update iTunes first, in order to make it all work with iOS5, you can do that by clicking on iTunes on the upper left corner of the window (with iTunes open) and click on 'Check for updates'....its a bit of a lengthy process, so just sit back and wait......I've updated my MacMini, iTunes, iPhone4 and iPad2...no problems at all and no issues with incompatible Aps...at least with the ones I use....
And yes, iOS5 is compatible with the first gen iPad.