As a photographer I would say that a better lens would make a better photograph rather than pumping up the megapixels on the camera unit, flash's on most compacts and camera phones are poor at the best of times due to their location(usually right next to the camera's lens) and at eye level with your subject which creates guaranteed red eye everytime!!
Mike.
That would be great and all, but the question is does any company actually manufacture a better sensor (I assume you meant sensor rather than lens) that can operate properly in something as small as a phone? If so, why don't we see them in any camera phones today?
Yes, a fixed direction flash will not produce anything remotely close to a professional photograph. They do allow you to take up-close photographs in low light that will produce a viewable image. Many people are fine with those limitations. Many people don't even consider such details when taking photos. Many people simply take photos for the sake of the memories.
As technology progresses, we will see better cameras in phones.