Can someone explain why DSLRs with full format sensor (like the Nikon D3 and d700) have excellent high ISO performance/ low noise but yet struggle with dynamic range?
OK, you are asking several different questions here, on slightly different aspects of the same subject, and so the answer depends on the question.
First, about DSLR dynamic range. It is limited at the high end by the saturation of the ADC, which takes the ouput of the ISO amplifier and digitizes it; there is a maximum value it can output, and therefore a maximum input it can cope with. When the ISO is doubled, one more stop or EV of input is pushed past the saturation point of the ADC and is lost.
At the low end is the noise "floor", really the point at which one chooses to quit because the signal/noise ratio becomes too low. This is governed by the electronic noise in the circuits that read the sensor, amplify the signal (ISO amplifier), and quantize it (ADC). This noise varies with ISO, and thus how much room on the noise floor is available depends on ISO.
The result is that, in terms of absolute exposure, one has a "window" between noise floor (the minimum S/N ratio deemed acceptable) and saturation, which is the DR for that ISO. For the Canon 1D3, it looks like this for various ISO:
The 39MP backs use a Kodak CCD sensor that has slightly less than 12 stops of engineering DR at the pixel level, IIRC. The MFDB pixel DR is comparable to that of pro level CMOS DSLR's (Canon 1 series, Nikon D3). But here one should distinguish pixel level DR and image DR. With twice the area of a FF sensor, a MFDB captures more light over the frame than the FF camera, so more signal and better S/N ratio and DR at the image level. The whole is more than a collection of isolated parts -- the individual pixels are similarly spec'd, but the MFDB has more of them collecting more light and when you do the math as to how DR scales when you scale up the sensor the bigger sensor wins in DR by about the change in linear size of the collecting area, assuming that the collection efficiency per unit area is similar (which it is, IIRC).
Most MFDBs work differently: they don't have different ISO settings; they offer the entire dynamic range in a single shot (therefor they do need a greater bit depth than DSLRs, though the 16bit is too much). The Phase One P45+ is an exception I know of, in that it has different ISO gains; there may be other exceptions.
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This is because, when the ADC used has enough DR not to cripple the sensor DR, it outputs all the information that the sensor has to offer. There would be no purpose to offering hardware ISO gain, all it would do is reduce the highlight DR without offering more shadow range, just as the DSLR's behavior at ISO 1600 and above. The difference is that, when the ADC's DR exceeds the sensor DR, that property starts immediately above base ISO rather than at some higher threshold, and thus there is no reason to offer hardware ISO -- it would just remove highlight headroom. The only advantage might arise if MFDB's offered jpeg output
