1) Reading List is Safari only.
2) Many popular apps (such as Twitter for iOS) actually support Instapaper's Read Later, whereas I'm not sure that there is a Read Later API (someone correct me if I'm wrong).
3) Instapaper has social sharing built in.
I've been using the iOS 5 betas and I can tell you I use Reading List and Instapaper completely differently. Instapaper has always been long form reading, stored for later (and potentially offline). Reading List, I use to quickly transfer a site I'm currently reading from my desktop to my iPad or iPhone, incidentally replacing an app I wrote to do exactly that. I guess it's time to take Panic's Audion advice and retire that app ("When you double click the competition in the morning, that's a pretty good sign that it's time to hang up your hat!", http://panic.com/extras/audionstory/)
The Reading List is just a folder named "Reading List" within your Bookmarks folder; anything that can create a bookmark can add something to it. (It's actually all your bookmarks that are iCloud-synced, not just the reading list.) I imagine there are a bunch of apps with code for an "Add to Reading List" button already written but #define'd out until iOS5 is released, to avoid confusing people who press it and don't get any syncing.
