VGA supports higher resolutions. However, the interface your TV uses for VGA input may not. Keep in mind most computer monitors are MUCH higher resolution than televisions (but this is far from the only factor to consider). You're better off using your computer screen (either a switchbox to the monitor, another monitor input, or run the set top box through a TV tuner card) for a television.
EDIT: Oh, and bigger isn't necessarily better. A smaller screen with the same display resolution will look crisper.
EDIT: And keep in mind 1280:1024 and 800:600 are different aspect ratios. Have you tried XGA (1024x768), 1280x960, SXGA+ (1400x1050)?
EDIT: Also, title says TV -> PC picture. What you are asking for is help with PC -> TV picture
What kind of a video card do you have in your machine.
Download the latest drivers or look on forums to see if any other one with your card has been able to make it run on higher res.
I had a similar issue with my x1650. Ended up downloading a set of unconventional drivers for my win 7 machine and now it rocks on 1920x1080. (PS. This machine of mine is primarily for video watching n stuff. not my gaming rig)