Hi
Liz - welcome to the forum!
Not sure that I can help but feel your pain - my iPad has the latest 4.x version and I'm holding off until next week to do an iOS5 upgrade!
But, I have all the iWorks apps on my iPad and since their newer versions are apparently compatible only w/ iOS5, every time I visit the App store, I receive these upgrade announcements for these programs and then of course cannot update due to the reasons already discussed - irritating! Now my older versions still work, but if I can get iOS5 on my iPad, then I'll update the iWorks apps - seems to DAMN complicated!
However, I'm assuming that you have the most recent version of iTunes on your computer, i.e. 10.5 (I believe), which is needed for the iOS5 upgrade; also, are you using the computer that your iPad is registered to and contains all of your purchased/free apps and your other files (music, photos, etc.) - please post back if these suggestions are helpful (or if not) - maybe those that have gone through this process can provide further assistance - good luck!