The only option for full raster 1920x1080 in 5.1 is Uncompressed HD. And not only will that take up a LOT of drive space, but you'll need a very fast RAID array to play it.
The only other HD formats it worked with were HD (1440x1080), DVCPRO HD (1280x1080)...and Apple Intermediate Codec (1440x1080), which is really only there as a stop gap for HDV. Quality stinks.
You are using 8-9 year old software...one at the cusp of the HD revolution. It doesn't have many options.
>I'm assuming that if i keep to the HD settings if I can, when I bring in the SD it will just look like SD on an HD screen, ie its not going to magically become higher quality, but it wont look any worse that it already did?
Correct...but worse. Because you will be blowing up the image to 10x it's original size. Any pixels or artifacts inherent in it will be magnified too. For good looking SD blown up to HD, you need to:
1) Use a Terranex to upconvert. This is the best option...external hardware.
2) Use an AJA Kona 2-3 card to upconvert. It is basically a mini Terranex.
3) Use Instant HD from redgiantsoftware to do the upconvert. But will it work on the old computer and OS running FCP 5.1? Have any compatible settings? Not sure.
4) Use Compressor to do the upconvert.
5) Use Adobe Premiere to do the upconvert. I've used CS6 for this, and it's just below the Kona in quality, but above Compressor and InstantHD.
You can't edit H.264 natively in any version of Final Cut Pro - it needs to be transcoded first.
There are countless threads on here that go into detail as to why. Type "H.264 is not an editing codec" into the search box at top right to find several hundred.
Transcoding for version 5.1.4, you are limited to Uncompressed or DVC Pro HD if you want to retain the most quality. Use Compressor to do this, there's no way to do it inside your version of FCP.
SD will look considerably worse - you will be blowing up 720x576 pixels to fit 1920x1080. If it was well lit and shot and uses a high quality codec, it might just scrape through.