Until you get a Blu-ray player, enjoy your standard-def DVD player. Just hook it up directly to your TV and set it to "Progressive". To get "Progressive" you need to either connect it via HDMI or Component. In either case, take your Optical audio-out from the DVD player and connect it to your receiver. This way, you get the best picture and the best audio. Speaking of audio, the difference between 7.1 and 5.1 is that you get an extra center-rear speaker and I believe an extra speaker for each side-wall. Do you need this? No. By the way, you can connect speakers in 5.1 configuration to a 7.1 receiver. You can use a 7.1 receiver for 5.1 and it will be fine.
For your VHS player, choose an input that has S-Video. I know that some combo DVD/VHS players have component connections, but the component does not apply to VHS, only DVD, and it looks like your VHS is stand-alone. It should have an S-Video out connection.
So, for your budget, do you need to get speakers and possibly a Blu-ray player, or do you already have speakers? If you don't have speakers yet, I'd forget the Blu-ray for now and use the money for speakers. 5.1 audio matters more in the surround experience than the picture, but a standard-def DVD hooked up properly will look stunning and great audio will totally enhance the movie experience.
I want to set up a new home theater system. I recently purchased a 32" Vizio VW32L. I have a Sony STR-DE325 receiver. A Panasonic DVD A110 (DVD Player), a Panasonic PV 8664 (VCR) and a Pioneer PD-F1007 300 disc changer (CD Player). I want to spend no more than $600 -$800 (of course, less is always better). I do not know the techy jargon very well, but I do see that some new systems are not BluRay compatible. I also see some systems are 5:1 surround and others are 7:1. Frankly, I do not know what the difference is, except the 7:1 seem to have better ratings and cost more. Having BluRay seems like the only way to go ... socan anyone offer me any advice?