This has the crazy ISO. Is 1600ISO on this body the same or different than 1600ISO on earlier Rebels?
As others have noted, the ISO number describes the sensitivity of the sensor (analogous film speed). Ideally all sensors will have the same sensitivity for the same stated ISO, in practice there is some manufacturing variation.
Also, do you have to shoot RAW to get a nice image at high ISO? Do I get graininess because I've used only Large/Fine?
Not necessarily. Canon cameras have built-in noise reduction which generally reduces the resolution (reduction of fine detail) to reduce the noise, so there are compromises. Some bodies allow adjustment of the noise reduction process in their menus. The reduction of RAW to JPEG also loses some information (once lost, it cannot be recovered).
If you shoot raw, you get to control the processing steps to get what you think is best. One can often do better than the standard built-in processing. (I generally shoot RAW+JPEG for such pictures so I can choose based upon the results.)
The noise comes from several sources.
* Light itself is noisy because it comes in discrete photons. The intensity is the average number of photons which have a noise (standard deviation) equal to the square-root of the average. Thus the percentage of photon noise is inversely proportional to the square-root of the intensity and brighter images (ie lower ISO shots) have less photon noise.
* The sensor pixels collect electrons knocked loose by the photons. It adds noise because electrons can leak in or out of the pixels. (This gets worse at higher temps and longer exposures.)
* The electronics (amplifiers and A/D converter) that reads out the number of electrons collected in each pixel also adds noise. (This is also worse at higher temps.)
All else being equal, larger sensors (ie larger sensor pixels) have less noise because they require larger apertures (for the same F-stop) which capture more light. (Thus the 5D2 has lower noise than the XTi.) Fewer pixels for the same sensor size also have less noise. (The marketing race for more pixels is increasing the noise.)
Ultimately, the noise is fundamentally limited by the number of photons detected by each pixel. Improvements in technology, however, can reduce the noise contributed by the other sources.
There is lots more info on the topic at
http://www.clarkvision.com/imagedetail/#sensor_analysis and
http://www.clarkvision.com/imagedetail/.
Doug