The Convert to HD feature can use in two ways:
1. When you initially import your original SD footage (from the Import window).
2. After you import (from the main interface).
Here is a screenshot showing both these options outlined in red.
Converting your footage to HD will increase the SD size from 640 x 480 pixels to 1920 x 1080 pixels. Using the Convert to HD Feature will automatically compress your footage in order to prevent huge file sizes. At this time there is no way to bypass this compression.
To scale we are using Apple's Core Image which uses interpolation to create new pixels. We also spent some time tweaking the results in order to get the best quality we could by including some amount of sharpening during the scaling process.
Give it a try by importing in SD and then converting to HD to see how you like it. If you don't like it you can immediately perform the "Undo" function (Command +Z) on your keyboard to restore the conversion to its original SD state.