It's both the TV and Dish!
HDTVs do vary considerably in their ability to display SD cleanly. Very few will approach the quality of a 36" Sony SD set, and most will far substantially short of that mark.
And Dish's SD quality is not that good on a large display. It is degraded by compression, which should obvious on the 36" Sony too. I found it easy to see the effects sitting 9' away from a 32" set.
When these two are combined the result frequently isn't that pretty. In your case you are expanding a compressed 4:3 image to 41", in 4:3 mode, on a set that is not optimized for 4:3 analog via s-video. Watching in 4:3, with the image not set up to be overly bright, is your best bet. But its not going to match your native 4:3 36" Sony.
And it will vary by channel, by program. When viewing a channel that's getting a lot of bandwidth, the picture can be pretty decent. When viewing over-compressed channels with low-contrast scenes, it can be unwatchable.
Are you watching any HD on that HD set? Once you do, you'll learn to live with the degraded SD as part of the price to view glorious HD.