Due to popular demand, iOS 5 has greatly improved email text formatting and now permits the user to apply bold, italics and underlining to messages.
As with many things tablet oriented, use the tried and true tap and hold technique on a word or text to show selection options. Immediately after selecting the desired text for formatting, tap the ▶ (right triangle) button in the floating menu to see more options. A button with the caption of “BIU” will be visible, tap this button and finally three formatting buttons – Bold, Italics, and Underline will be available for use.
Tapping one of these buttons will immediately change the style of the selected text to match. Consult the screenshots above to see a step-by-step walk-through of this process in action.
UPDATE 2012-03-01 – Consult this post if you need to send emails from your iPad with different foreground or background colours.