I encountered a problem setting up iCloud on my iPhone 4 after installing iOS 5 -- here's how I solved it.
In my case, the problem seems to be that I my iCloud and Store accounts are separate -- our family uses a shared store account but I have my own iCloud account. It seems that the backup and restore process used my Store account for iCloud even though on iTunes I had asked to use a different one. Might be something that only happens with Verizon phones (that never got Home Sharing or iOS 4.3). Just guessing.
After this iCloud backup, Photostream etc. all seem to work fine.
A more conceptual version:
Found near Church and 15th streets, San Francisco.