It should be done like this (using the callbacks) -
function nextSlide() {
slideshow.fadeOut(function() {
$(this).attr('src',images[current = ++current % images.length]).fadeIn();
});
setTimeout(nextSlide, 5000);
}
This insures that the source is not changed until the fade out is complete. The source changes and the fade in then happens. This will not be a cross-fade though.