"But wasn't bugs life rendered at some insane resolution before being dropped down to dvd level?"
Nothing is stopping any console, or PC for that matter, from doing the same. That truly doesn't make that much of a difference anyway, moving beyond FSAA it offers no real advantages and can have some drawbacks also much like FSAA(besides performance).
The fact is that A Bug's Life on DVD is displaying at a resolution any good TV can handle, the tube doesn't change because of the video signal

 A Bug's Life is still well below the limits of what TVs can do, Disney's Dinosaur will trump A Bug's Life and something else will come along even better(not to mention DVD doesn't utilize the 800lines of res that the higher end TVs have). Increasing resolution in PC games is a way to make the sh!t we are used to look better. Higher resolution will continue to look better as we progress, but low res extremely complex scenery such as DVD movies will look better then extremely primitive games such as Q3 and UT at 1600x1200.
It is very impressive what the modelers for games have been able to do with the meager poly allotment, don't get me wrong. Being able to create scenery such as we have in Q3 with only ~10,000 polys takes talent to be sure, but if we give those same talented people 100,000 or 1,000,000 polys to work with, along with the environmental effects that the X-Box and upcoming PC hardware will have, we will start to see exactly what is available at resolutions as low as, and even lower then(for those with lesser TVs) 640x480. Higher res will continue to be better, but it is a very slight increase in visual quality compared to what we still have available at 640x480. We will reach a point in time when resolution 
is the limiting factor, we just aren't even close yet.