My expectations are somewhat down after seeing the iOS 5 icon with the same waterdrop background as in iOS 4.
There are so many signs that point to a moderate update:
- Notifications? Could also be an bigger iOS 4.x update
- iCloud? Just update the iDisk app and improve upload/download capabilities. But maybe there's a connection to Lion's AirDrop feature...
- Widgets? Don't see it happening
- Improved Lockscreen? Maybe as part of the new notification system.
- New UI? Don't think so, especially since Apple showed Launchpad for Lion. It's the same grid-like UI, even with the same fugly folders...
My lowered predictions for iOS 5:
- iCloud syncing for some media, but not everything
- MobileMe still around, but with tiered pricing plans
- Notifications, but not something completely new or revolutionary, just less annoying.
- Improved Mail app (Flags, rich & selectable HTML signatures per account, etc.)
- WebKit 2 engine for Mobile Safari (Release of Safari 6 for Lion)
- Reading List syncing with iOS devices
- AirDrop capability with unified Files app
- More business and security features for enterprises
- Maybe improved SMS app?? (Twitter integration, WhatsApp killer?)
- API for unified File location with Folders set-up
- Facetime over 3G
Again, I hope for more. My inner fanboy demands it

! But I try set to my expectations low. The iPad 2 event already lacked a lot of new things and I don't see many crazy new things as far as integration of iOS and Lion besides Files and media syncing with iCloud/AirDrop.