Since the predecessor already had an excellent camera, it's not surprising that this one is even better (higher resolution and supposedly better low-light capacity).
I'd say it can easily replace compact cameras for most people's use. Especially now that with iOS 5 you don't have to log into you phone to take a picture.
By the way, TidBITS has a great summary article of various reviews of the iPhone 4S.
In the other end of the scale, Canon has announced a new flagship camera, the 1DX. What's amazing is that they actually listened to my prayers (sort of), and kept it to 18MP! Well done Canon. I'll bet it can shoot black grizzly bears fight in a cellar at night.
... Now to see what the 5D mark III will be like.