I just wanted to add my thoughts to this thread. I had used the Lifeproof iPhone 4/4S case for nearly a year before I purchased my iPhone 5, and I've had a Gen 1 Fre case for my iPhone 5 for about a week and a Gen 2 case for two days now.
First, speaking as someone who has used a Lifeproof case for quite a while now, I think you need to go into this realizing that there will be some compromises to get a waterproof case. If you don't need (or want) a waterproof case, then you may want to look elsewhere.
That said though, I love the waterproof-ness case. Occasionally I get stuck waiting in the rain and I love that I can take out my phone and use it without worrying about it. I need to be on call periodically for my job and during the summer I spend a lot of time swimming. I love that I can put my phone near the edge of the pool or even take it into the pool with me when I'm swimming and need to make sure I don't miss a call. It can be fun, especially with kids, to take pictures in and under the water too. If my phone gets dirty I can just rinse it under water. I'm sure there's more, but that's what I can think of right now. For me, I'm happy to put up with a few compromises to get these benefits, but I realize they're not for everyone.
As far as the compromises go, here are my thoughts:
Pillow effect. First, I think there might be a bit of confusion with this term. With the original iPhone 4/4S case it was possible to get air trapped in the case that would cause the whole screen cover to expand out slightly away from the screen... like a pillow. Because the case was sealed and there was lightly more air pressure in the case this could make using the touchscreen a bit difficult. They made some changes with later versions of the 4/4S case to reduce/eliminate this problem. I haven't see this problem at all with the Fre case.
However, there definitely is an issue where the foam near the earpiece at the top of the phone (and to a lesser extent, the little spacer under the home button at the bottom of the screen) will force the screen cover away from the surface of the phone at the top (and bottom) of the phone. This isn't technically 'pillow effect', but it is definitely an issue. The iPhone 4/4S case experienced this as well, however, it was much less pronounced. Because of the taller screen the ear piece and the home button are closer to the screen on the iPhone 5. Additionally, Lifeproof seems to have used a different solution for the earpiece for the iPhone 5 and this seems to require a bit more depth, which just makes the problem worse. The slight separation at the bottom of the screen doesn't really bother me at all... possibly because I used the iPhone 4/4S case for some time and I probably got used to it, however, I do get a bit annoyed with the separation at the top of the screen. This makes it more of an effort to slide down the notification bar, or tap the top banner. I can live with it and I'll probably get used to it with time, but I'm hoping Lifeproof might come up with a better solution for this. It's worth noting that the Gen 2 case might have a *slightly* smaller gap at the top of the screen, but only slightly. I spent a bit of time trying to compare the two pieces of foam as well as the way the gap looked when the phone was installed and I believe that the Gen 2 case is slightly better, but only slightly. It's also possible that I'm just imagining things.
Rainbow effect. It looks like Lifeproof put some sort of an antiglare type coating on the inside of the screen, likely to try to fix the rainbow effect issue. This definitely helps, but I'm not sure it's totally eliminated the problem. When the phone is off, especially if you look at an angle you can definitely see a bit of rainbow effect. However, when the phone is on and you're looking straight down at the phone it all but totally disappears. With the iPhone 4/4S case you could fix the rainbow effect by putting a very light dusting of corn starch or baby powder on the phone screen before you installed it in the case and so far I haven't felt the need to do that with the Fre case, since you can't see an issue with the phone on. I may still try at some point. I didn't really notice any difference here between the Gen 1 and Gen 2 cases.
However, the coating on the inside of the screen does come with a bit of a downside. It adds a bit of 'visual texture' to the screen, especially with bright screens. If you take the phone out of the case and look at a white screen (an empty tab in safari is a great way to get a mostly white screen) you can see that the screen looks solid white. When you put it in the case you can see that it gains a bit of 'texture'... a while bunch of tiny moire effect patterns. It hasn't bothered me too much, but I still don't like it. Honestly, I think I'd rather have an uncoated screen and use a bit of corn starch to fix the rainbow effect. As above, I didn't really notice a difference here between Gen 1 and Gen 2 either.
I haven't really had any issue with sound quality or rattling, however, I should note that I really don't use the speaker phone or the speaker on the phone very often. For the most part I use a bluetooth headset for phone calls or a jambox for listing to music. I do occasionally use the phone itself for phone calls and I haven't really had any trouble there, but with the Gen 1 case I would get a little feedback occasionally. I haven't heard that at all with the Gen 2 case yet, but it's only been 2 days now, so I'm not quite ready to call it cured.
The other thing that hasn't really been mentioned here, but probably deserves a mention is that the charge port opening is considerably larger than the lightning connector. With the iPhone 4/4S case the port was pretty much exactly the size of the original apple 30 pin connector. This meant that most 3rd party connectors simply wouldn't fit. With the Fre case it seems like they've added a bit of extra space here, so that shouldn't be a problem now.
The last thing I wanted to mention is that I see a lot of people complain about the cheap feel of the case. I think part of that comes from the fact that this case is crazy light and people tend to equate weight with quality. Because the case just consists of a couple very thin and very light pieces of plastic it does feel a bit cheap as you first take it out of the box. However, it does appear to be made from reasonably high quality plastic and once you get it installed on the phone it looses the flimsy feel and doesn't seem like a cheap case at all.
I think that's about all I can think of right now. In summary, if you're coming from a 4/4S case, then you're probably used to most of the downsides and you should be happy with the Fre case. If you're new to Lifeproof then it might take a little time to get used to it, but hopefully the benefits outweigh the small inconveniences. If you don't need or want a waterproof case, then honestly, I would suggest looking elsewhere for a case.