You're both right, and at the same time wrong. The important ingredient you're both omitting is the optics. You can have all the MP you want, but if you've got a crap lens, it won't matter, as ysss notes. Optics can only get so small and still be effective. You can help offset that with a larger capture area, but even that has limits. There's a reason you see monster lens systems on professional cameras. You need that space to bend the light properly, given the materials available.

If they've increased sensor size, and properly fitted a decent optical system over it, a 12MP sensor can in fact be a great improvement. But there are limits to what you can do and still compact it all into a phone-sized device. Once you've crossed a certain limit (and 12MP is a hair past that IMHO) then any MP gains are lost to fuzz.

Trust me on this. I work with camera sensors that are over 30MP and lenses in the X00mm plus range daily... If there's one thing I know, it's image quality, and the optics are a key part in any imaging device. That was one of the reasons I liked the N900. Not that it's lens system is the end-all be-all, but they're at least attempting to use the sensor to it's fullest. If you have a fixed lens, don't bother going over 3MP.