I don't have ME experience (will, I don't have any EE experience either, ha), but I can maybe give you some more details on what I'm talking about.
I think what magnatro is talking about may be possible, but from an engineering perspective I think it kind of silly to design a large system that could be replaced by a a few millimeters of silicon.
The way this works is as follows:
On a PIC, you use the CCP (capture, compare, pwm) module to count the pulses. You could use multiple pickups at at 180 degrees to double the resolution, or at 90 degrees to each other to quadrouple the resolution (etc, etc). You run these measurements through a lookup table, for example, in your program that tells the PIC to set the digital potentiometer to a certain resistance. It sets this by setting or clearing certain ports, or perhaps by UART, depending on the digital pot's interface. Just see if you can find a tutorial on the CCP module and digital pots and I think you will get what I'm saying.