This is a difficult one. The reason is that this episode acts as an intermediary that ties several subplots together and spins them into new subplots. Already in the recap we are reintroduced to Suki and Jet, both minor characters from season one. That, and this episode sets the foundation for the Ba Sing Se arc, probably the most story-heavy period of the entire show.
In terms of continuity, there is a definite cut in the beginning of the episode. While the last one ended with the gang in the desert, this one starts with them clear of that environment, and choosing a route to Ba Sing Se. And we also get Aang facing extremes in his emotions; whereas in the last episode he was filled with them, he is now devoid of them. These conditions mark this time as an important point in Aang's character development.
The scene in Full Moon Bay reveals a great deal of information. The war has affected a large amount of people, now all seeking refuge in Ba Sing Se. Next to that, Aang seems to have gained a lot of fame, even causing people to impersonate him. Along that line, Toph's family seems to enjoy a great deal of influence throughout the Earth Kingdom. But most importantly, Suki reappears and joins the gang as they travel through the Serpent's Pass.
In the meantime, Zuko and Iroh meet up with Jet. Their meeting is two-fold. First, it's ironic that a Fire Nation hater becomes fast friends with two Fire Nation people. Second, there is a lot about their future development left in the dark; Jet and Iroh both claim to want to leave behind their old lives in Ba Sing Se, but just how far this will hold true is still unclear.
The travel along the pass itself includes some interesting development between Sokka and Suki, and their pasts meddling with their present together. And there is a hint of Toph having feelings for Sokka. Though it is way too early to tell anything about this yet, if it is true, it would certainly add a very intriguing new element to Toph's character.
The end of the travel is bittersweet. Katara turns out to be an experienced midwife, and Suki decides to leave the group again. Aang gets his hope back, but the whole naming debate seemed too dragged out and too unnatural. And, true to it being a recurring motive throughout this season, Aang once again tries to confess his feeling to Katara. However, the true ending is yet another shocker: A massive drill is preparing to attack the walls of Ba Sing Se.
This is already the third episode in a row that doesn't really have a dramatic arc going through it. There's no real introduction, no buildup, no climax, and no resolution. Instead, the episodes always end on a very clear "to be continued" note, with a cliffhanger dominating the ending. While this should push down the grade for poor narration, the opposite is actually the case; the episodes now tie together much more closely, and knit a tight story that flows through each chapter. If this continues, the show will reach a new, and much higher, standard than ever before.