First, since you were kind enough to post the actual model number of your TV, I looked at the owners manual on Sony's website for your TV. It is a rear projection CRT utilizing 7 inch individual cathode ray tubes for red, green, and blue. Or, just a normal rear projection CRT. So, my info about on resoution w/CRT definitely applies to your set.
MORE IMPORTANTLY:
S-Video carries 480i signals only. It can't carry high resolution computer signals like you thought you were sending. So, instead of 1024x768 progressive, you sent it (more or less) 640x480 interlaced which is 480i. One of the lowest forms of video. Also, your PC had to change the resolution from 1024x768 to 480i which is a huge degradation in image quality.
DVI out to DVI in, if the TV actually accepts computer resolutions then that is definitely the way to go and you will see a big beautiful image. S-video or composite video outputs like are commonly found on VCRs, regular cable boxes, and camcorders can only carry 480i and represent the lowest form of video quality. I imaging what you saw looked like a piss-poor VHS tape on screen instead of a sharp computer image.
Your PC may have a resolution setting of 1080i (mine does) which when sent over the DVI cable should be 100% compatible with your TV and look razor sharp. It may also have 720p or 1280x720 which is the same as 720p - that should work as well.
The most important thing is to actually hook your PC up to the DVI or HDMI input on the TV. It actually looked like in the manual that you have a HDMI connector on the back of your TV. But, the owners manual shows that you can hook up to the HDMI input using a DVI to HDMI cable. Should be easy enough to try out and cost about 20 or 30 bucks for a cable.
