HD footage is poor quality in SD preset. Why?

Hi folks,
I usually work in HD and, hence, use an HD preset. However, in my current project I'm using mostly captured VHS, with just a little bit of HD footage here and there. I want the aspect ratio of the finished piece to be 4:3 (i.e. to suit the captured VHS footage). To accomplish this, I've selected the SD (720x480 DV) preset. However, the HD footage lacks clarity in this sequence pre-set (it looks fine if I use an HD sequence). Is there some other approach I could use to get my HD footage to look good in a 4:3 aspect ratio? Or, am I just doing something wrong?
Thanks very much!
Vixter

Thanks a million, Tom. I know one thing: digital is a lot more complicated than analog! A lot cooler, and a lot more powerful. But much more complicated. There are no standards! And, even if there were any, they'd be changed tomorrow!
Would you be kind enough to answer one more question for me?
I'm creating a video for my family for Christmas. If I was creating only one version (for myself), I would de-interlace and just show it to them on my HDTV. However, I would like to give each of them a copy on DVD. Do I need to make two versions? (i.e. a de-interlaced one to show on my HDTV and an interlaced one for them to watch on their regular televisions?)
Thank you so much!

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