I dont see how the sensor resolution can really be much better when the sensor is the same size and the only improvement is updated processor and more pixels are crammed into the same area.
"Crammed" is a connotatively loaded word. The evidence suggests that "cramming" is good, in general. The best 10/12 MP P&S cameras "cram" a lot more pixels than the densest DSLRs, and yet collect far more photons per unit of area with the same exposure (1.5x - 3x as many). The crammed little sensors have less shot noise per unit of area than the DSLRs at all ISOs. They also have far less read noise per unit of area than all CCD DSLRs, and all CMOS DSLRs at low ISOs. On the cleaner DSLRs (like the 1D mk3 cameras and the D3), the crammed little sensors have about the same or slightly inferior read noise per unit of area at ISO 1600.
Isnt this the same as adding resolution in photoshop ?
Not at all; "adding resolution in Photoshop" does not make the noise grain or bayer artifacts finer, and does not decrease overall image read noise the way higher pixel density can. It can also never give more subject detail.
I could be wrong, just my gut feeling.
Your gut may not have a useful working model.
I mean if all you needed to do was update the processor and cram more pixels into the same size mm sensor why does the the hassies and sinar use sensors that are 2 or 3 times the size of the XSI ?
Digital backs are made to replace film on a format in which people already have a huge lens and body investment. They are *extremely* inefficient at collecting photons, in general. Most have no microlenses, and lose most of the photons between the photosites. They also tend not to have anti-alias filters as well, to give the "pixel-sharp" look I spoke negatively of earlier in the thread. Someone in another web forum I read linked to RAWs from the 22MP Sinar; the pixels only collected twice as many photons with the same exposure as the pixels in the 10MP Panasonic FZ50, and had higher read noise. There's 22M of them, and that is their only savior, besides the fine lenses they get to work with. The same space filled with pixels from the FZ50 would give vastlly superior results. The fact that the back offers ISO 25 is a hint; there is no way, with current technology, for a single exposure of the sensor to give ISO 25 with an efficient photon collection, unless that ISO 25 had no headroom (too little to work with).
I think the limiting factor in most digital is the tonal range which I attribute to the bit depth, and more largely to the sensor size. who knows, maybe in wrong...
Bit depth is generally not an issue at this point in time. The Canon K10D at ISO 100 is the only camera I am aware of that actually has even slightly posterized RAW data (and ever so slightly).
Sensor size, in theory, should place a limit on total-image-level S/N for photon shot noise. As I've already suggested, however, the efficiency varies greatly amongst cameras, and it is always possible for a smaller sensor to collect more photons through better efficiency.
The fact is, in the current state of affairs, the efficiency is highest for the smallest sensors, and lowest for the largest sensors, compressing their range of relative effectiveness much more than need be.