Digital cameras need a computer processor inside to do their imaging magic, just like a lot of devices. My cellphone has one. My wife's iPod has one. Unlike my cellphone, which isn't advertised as having a Moto-Blast processor or something silly like that, some of the camera manufacturers have given their processor a name. In fact, they also give it a generation number. The first version was a "DIGIC", which was then followed by a "DIGIC II" and more recently, the "DIGIC III".
Since Canon advertises these names, people start to compare different models based on the processor.
I think that folks should understand that all the DIGIC contains is a CPU (just like your computer) with some special functions to convert the image data out of the sensor into JPEG or RAW files. And control ports for all of the buttons and display bits. Without any software to tell the camera what to do, the camera is about as useful as a brick. Your camera needs some software, which is usually referred to as "Firmware".
Canon, in the interest of saving programmer time, seems to have a bunch of software that's shared between all cameras. This is kind of like Windows... everybody doesn't have to write their own version of windows when they just want to write a pocket calculator program, and even though your computer may not have a TV-input port, Windows can still support computers with a TV-input port. Canon bundles up all of the software for the camera into a nice package, most of it common between all cameras, some of it not and stores it on some flash RAM in the device.
It's important to remember that many things are not functions of the hardware, just the software. For example, folks have discovered is that you can turn on and off a bunch of hidden functionality on certain Canon cameras. All of the DIGIC II model cameras can be coaxed into letting you save RAW images, for example, probably to help the developers fine-tune their software.
With the DIGIC III hardware, Canon used the additional CPU power to tweak some of the software, adding face-detection autofocus and changing how the noise reduction algorithm works. This puts us photographers in a fun position because the CHDK software only works on the DIGIC II cameras and some folks like the way that the old noise reduction algorithm worked, even though the DIGIC III processor is otherwise better. All of this is not a matter of the new processor magically supporting fundamentally new features, just a matter of the new processor having more CPU power.
While we are on the subject... many many things can be tweaked by Canon after the fact by downloading new versions of the software. However, unless it is a glaring flaw in the camera, it is not likely that your favorite feature will be fixed. The notable exception is the highest of the high end cameras, because Canon actually has a long-term relationship with these folks and they generally won't spend between three and eight thousand dollars very often. Otherwise, Canon will either chose to ignore any complaints (for example, people have been complaining about the lack of RAW for a long long time now, and Canon isn't budging there) or release the fixes as a new version of the camera (for example, people weren't using the "Direct print" button, so newer cameras now let you assign a function to it, but older cameras, even though it's a quick software change, can't).
Remember, every time they release a firmware update, they have to spend a bunch of time and money making sure that there are no bugs, that it installs without breaking your camera, etc. So unless the firmware update is going to really sell more cameras, it's not going to be worth Canon's time.
I prefer weirder names myself. I failed at getting a project code named "Power Tentacle" but I did manage to get a project named "Max Headroom". Someday, I'm going to get something named "Failboat"