Yes I'd say you hit it when you said you can't use composite and s-video at the same time. It's either or. Run an s-video cable from the output of the 3300 to your TV and see if that fixes it. You might even be able to keep using your composite VCR as it may upsample but there's no way it will downsample and send s-video through composite.

Worst case is that you'll just replace the VCR with an s-vhs model..or even better a DVD recorder