The short answer... it rocks.
Apple has taken a nearly perfect piece of software and made it better. There's a full write-up on Apple's site, but I'd like to share some standout features and what they really mean to the end user.
Movies – So they're only from Disney-owned companies (for now)... someone had to be first. What's nice is Apple upped the quality to 640X480 which looks great on a laptop and playing off an iPod to a TV set via the AV cable. By the way... it's you buy movies (and everything else) from the iTunes Store (they dropped the word Music).
Cover Flow – You can now flip through all of your 'albums' by cover.... it's a cool 3D effect that encourages browsing and helps put a face back on those 'virtual' albums. Missing artwork? No problem... iTunes will now download artwork for free and add it to any song in your library (provided the album is listed in the iTunes store). 
New User Interface – The Source List allows you to view and manage all of your files and devices. It really lets you take control of your collection (especially if you have multiple iPods).
iPod Games – Just what I need... a waste of time... but I've already bought three. So far Cubis is my favorite, game-play with the scroll wheel is enjoyble and at $4.99, it wasn't a hard sell. The games only work with the 5G (or video iPods) but no problems for me as my nearly year-old iPod worked fine.
Device Management – You know get total control over each iPod, including which elements sync. I particulary like the visual interface that displays the contents of an iPod.
Download Manager – You can now control the order of downloads (useful when you want to hear the music you just chosen and its stuck behind a HUGE movie file. What is even better is the ability to pause (or stop) a download and resume where you left off. This was helpful while riding the Amtrak Acela to New York as my Internet connection kept dropping (hey... tunnels... Hudson River... I understand).
Onscreen Video Controls – Straight out of QuickTime, you now get a great controller that floats over the picture (when you move the mouse). Convenient controls are easy to reach (including a useful full-screnn button). I find this most useful as my keyboard shortcut database has no room left in the brain.
Library Backup – Having lost music... I really appreciate this feature. You can now initiate a “Back Up to Disc” command. This quickly allows you to back up your entire iTunes library to CD or DVD.
Reverse Sync – If you plug your iPod into another computer that has been authorized for your iTunes account (up to 5 machines), you can now transfer music OFF the iPod. It only works with music purchases... but its flawless.
To get the new update... visit the iTunes page.