You'll be unsurprised to learn that the 5th gen iPod nano is no better than its predecessors as regards its audio reproduction. Overall volume output is still a little lacking and rival players from Sony, iRiver and Creative - to name but a few - still have a fuller sound. The nano may support Apple Lossless audio (as it has since the 1st gen launched) but I defy you to notice the difference without using an external DAC.
As ever, though, it's only pedants who will point this out as a fatal flaw. The nano is, after all, a portable media player and while in A-to-B testing it may not have the sound quality to match other players, in the real world it's entirely good enough. The bundled earphones are as god-awful as ever and should be disposed of ASAP. Seriously.
If you have a compatible set of headphones, the nano now supports the same VoiceOver feature introduced with the physical-control-free iPod shuffle. It's a bit of a pointless addition, but I guess it's better to have it available and not want it than vice-versa.
Ultimately, if you're just after a small, portable device to listen to music and don't care about finesse the iPod nano isn't for you. Likewise, if you're after a cheap pocket camcorder and already own a decent media player the nano is only a worthwhile upgrade if consolidation is everything to you.
If, however, you're in the market for a new music player the addition of a video camera finally justifies the nano's price premium far better than "it looks nice" ever did. Although if you don't care about video recording, I must remind you the nano is very shiny!
The 5th gen iPod nano is inarguably Apple's best yet. It's still more expensive than its peers, but it's got more style than any rival and the addition of a video camera gives it more than a modicum of substance too.