I take it this is the same version as this release:

viewtopic.php?t=4767 ?

I saw this at a friend's place on the weekend, and he swears it was a legit version, but the disc was riddled with pixellation. Mainly it was only noticeable on camera pans and particularly songs (Jaane Kyon and Koi Kahe coming off the worst).

The HD will be as good as the negative allows (and better due to digital clean up).

Hopefully the cleanup will be such that natural grain is not lost

No grain is touched. The clean up refers to edit splices (with ugly warps etc.), tears, speckles, dirt, scratches, flicker (camera problem).

You are right -- but there have been a few cases in the past where the cleanup ended up in affecting some grain - resulting in the "movie feel" being lost and the feel being more of a video film.

The Universal PAL edition has aptly been called the "Technical Edition" of Citizen Kane on DVD. It shows wonderful film grain, but suffers in the sharpness department. The Warner NTSC version has been brightened, enough for scholars to notice in some shadowy scenes. The sound in the Warner is quite poor where the Universal has been beefed up a bit. The Ken Barnes commentary on the PAL edition focuses quite heavily on the technical aspects which is certainly important and illuminating. Bogdanovich and Ebert's commentary on the Warner is likewise interesting and informative. I can't rightly say one is "better" than the other, but I personally enjoyed the Warner more.
I can't get past the sharpness issue. The Universal version is quite hazy in comparison (look at the newspaper text in the first large capture). I found the PAL version so dark that it actually eliminates information from the screen (see the head on the right side of the 3rd large capture). I can't help but feel the Universal is saturated as well as having the PAL speedup issue which is not adhering to an original viewing experience. I expect the debate with "Kane" scholars can go on indefinitely. What would have been best would be the integrity and film grain of the Universal (and sound!) and the detail and clarity of the Warner... and the Extras of both... and no PAL speedup.. and no cropping. I expect that true buffs (and there are many!) should buy both versions. It is nice at least for the rest of us to have a choice.

You are right that normally, and for newer releases, grain is not affected by digital cleanup.

However, grain has been lost on some digital restorations - such as CITIZEN KANE R1 - http://www.dvdbeaver.com/film/dvdcompar ... enkane.htm