Image Quality: Is newer better?

Look, this is a hardware geeks' forum, so there is a strong pre-disposition among this population to conclude that newer is better (if for no other reason than to self-justify the commentor's latest purchase). Also you need to factor your use and needs versus others.

That said, there is a general improvement in the sensors, so, generally, newer is better.

BUT there is a world of difference (well, okay, two-plus stops worth) in the DR and ISO capabilities of larger-sensored cameras versus 1/2.3 or 1/1.7 sensored digicams. m4/3s, Nikon 1s, or Canon's G1x or new M, various Fuji models and others are all equipped with sensors at least six-plus times larger than digicams. You cannot cheat Gawd; that area difference (at a given technology level) always has benefits; the "bit buckets" are simply bigger and more accurate. These cameras also generally let you shoot raw, which is another stop or so of DR, and opens much greater flexibility in post-processing.

How does that show up, exactly, in your photos? Outdoors it means skies actually have color; shadows or low light have tonal scale, not pixelated noise. Enlargements -- and cropping -- are much easier to make with acceptable detail and noise control. There is a reason people choose to carry dSLRs (well, other than vanity); the larger sensors have real photographic benefits.

If you take your photography at all seriously and chafe at the limitations that i mentioned, i would at least look into some of the newer, bigger sensored, options. Many Oly and Panasonic m4/3 models, or the Canon models, are only modestly larger than digicams. There is a weight penalty, but it is still nothing like a dSLR and you may find it modest.  Heck, if you carefully choose a two-year-old model being remaindered, it may not even be more expensive than a better digicam.

If you are happy with the images that you get and, for example, mainly shoot to share pictures on the net (for example), than i would say replace it.  But there are good reasons to consider options to small sensored digicams.