We left off in the last step with our iPad backed up and synchronised. Before we begin the process of using our downloaded IPSW file to update our iPad iOS version, we need to tether our phone to our Mac, so that iTunes will be able to verify and authenticate the update. Without this brief connection to Apple for verification, it becomes impossible to update your iPad to iOS 4.2 (or higher), barring jailbreaking, which this tutorial does not cover.
This information from Apple explains a bit more about the requirements for tethering your phone. I connected my mobile to my Mac via the USB port instead of using bluetooth, although bluetooth is permissible and the choice of many users for convenience. Open Settings, select General, Network, Internet Tethering and switch ON, select your preference of USB or Bluetooth in the blue dialog that appears shortly after turning on:
You may now turn off tethering on your phone and disconnect devices from iTunes if you desire.