Sound discrepancy - mute your TV. Sending signals to different compnents is just leading to a lag in your case. You're sending one signal to the TV, which then runs through the TV's electronics, and another signal to your steroe, which then runs through its electronics.
May not always cause a problem, but if it does in this case turn off the TV's speakers. If you have problems with speaking, upgrade your center channel speaker
Cable box: I have a TWC Scientific Atlantic. I let it send whatever the best signal available is. If it is upscaled 720p in 4:3 aspect, I stretch it with my cable box. Are you saying you WANT to send 480i to the TV?
As for SD, it's just grainy. I wonder if I had another TV at 37 inches if it would still be as grainy.