I agree, I really hope iOS 5 introduces wireless incremental updates. I shouldn't have to connect my iPhone to my computer to install a small .x update.
Did you see the post earlier that explained the reason for this. 1.1.1 was an incremental update but because some jailbreakers are patching iOS directly, it can cause the official iOS patches to collide with jailbreak patches causing a device to become bricked.
By restoring the entire OS over the top it can get rid of any unauthorised code that Apple hasn't tested for so the phone works as it was intended on upgrade.
Basically you can blame the jailbreakers for it (I don't jailbreak but at the same time I don't really care if people jailbreak either just I can understand Apple wanting to remove jailbreak code on an update because they didn't code it so they don't know how it'll react)