Near-DVD quality, almost no grain.

...if it was a direct digital transfer like I imagine, its virtually impossible for any "grain" unless it was added by the animators...

Perhaps my eyes are playing tricks on me, then.
Isn't grain a side effect of compression?

No, grain is essentially what gives film, still or otherwise, its detail and "filmic" look. What you're thinking of is the basic compression artifacts that come along with...compression.
Here's a simple diagram that'll give you an idea.

The one on the left has some simulated film grain, the one in the middle is the original image, and the one on the right has some heavy compression artifacts. Keep in mind that this is just simulated, but you get the idea.
Spok was commenting more on the quality of the FMV's, which is a HUGE leap over the horribly pixellated 15fps video on PSX games (compare FFVIII's high-res bink files to the PSX video). And what he was referring to was the Bug's Life dvd's. The first one was put onto DVD using an original piece of film, and was later replaced with a new one (due to Jobs' insistance) using a direct compression from the original cg video. All the benefits of the film without the limitations of film itsself.

Oooohhhhhhh. *nods stupidly*

It took 5 minutes or less.

Dude, that doesn't even make sense...
1. "You have too much time."
2. "It only took 5 minutes."
3. "You're rich"