The S-Video outputs from PCs include a scaler that will crunch everything back down to 640x480i, that's why you can go up to 800x600 (some cards allow 1024x768) on the S-Video output and still have it work. It's also why it looks so fuzzy.
The component outputs most PC cards use attempts to pass the output through unaltered aside from converting colorspaces to YPbPr. That's why it's picky about resolution and timing. 640x432 interlaced at 60Hz is about the closest you'll get to NTSC compatible video. Anything with ~525 total lines (not all of them are visible!), enough blanking/sync times, and 59.9-60Hz should be readily compatible.
The Sony WEGA series does have a reputation for being picky about refresh rate. This is mostly noticed by people attempting to play PAL games using the component inputs (since component nullifies the difference between color encodings, the standards are compatible aside from resolution differences). The WEGAs apparently don't like anything below about 55Hz, while many TVs are just fine all the way down to 49-50. This would cause problems attempting to run certain games natively such as MK2 which runs at 53Hz.
The horizontal lines referred to are what hold the aperature grille up. They are very, very fine black lines that run across the entire screen. They might bug you, though.
If you want to hook an arcade board up to a TV, there are several converters out there that will accept standard res RGB inputs and output YPbPr component or S-Video. Quality varies, and component is not necessarily any better than S-Video, especially with good televisions like a WEGA. Note that these devices require standard res timed input; they will not convert resolutions or framerates for you.