Huh? Time for some digital photography 101. What really drives perceived picture quality is having a clean image. By that I mean one with good dynamic range, and most importantly, low noise. Noise is that grainy rubbish that distinguishes phone and other cheapo small cameras from prosumer or better DSLR or better kit. (Not that these don't have noise, but the threshold at which it becomes a problem is MUCH higher). My main camera is "only" 8MP but it can easily show the difference between a $100, $500 and $10000 lens. The iPhone wouldn't know if it had a coke bottle in front of it. Why? Because its sensor is so tiny that it is starved of light. Less light means lower signal to noise ratio, or in other words, more noise. And why is the sensor so tiny? Because that way they can put a 2c piece of plastic in front of it and it doesn't affect focus, due to an extremely high depth of field. The smaller the aperture, the simpler the "lens" in front can be (to the extreme of a pinhole camera that needs no lens at all).
So while a 5MP sensor might be able to be squeezed into the iPhone, what you really want is a bigger sensor (physically) to capture more light. Now, you can compensate a little for noise by using more sensors (higher MP) and then sacrificing some in the name of noise reduction (ie, make the picture smaller). That's why that tiny classroom shot someone posted looks so clean. Let's see the full size (unfiltered). But most people would never think of that. They just use whatever comes out of the camera. And anyway, it will never compensate for size!!
All this makes me wonder what "autofocus" means in the rumor. Currently, there is no focus. The depth of field and low res makes up for that. If the sensor were made bigger, you would need more elaborate optics and DOF will become an issue. But I can't see any sort of physical focus mechanism being incorporated into the iPhone.
No, Apple are better off concentrating on speeding up the video pipeline to allow full speed video, and maybe adding a front facing camera.