I haven't watched many movies using my 1050. The way you have it connected is good -- and you are right to leave opt1, opt2, and coax off. Those are there to allow you to use one of the digital inputs instead of the analog inputs, and you're VCR only has the normal analog; when you add a DVD player, you will want to use a digital connection to get Dolby Digital and DTS. When you set your 1050 to "Surround" mode, the receiver is trying to decode the stereo signal from your VCR (assuming that it's a "hifi" VCR with stereo outputs) using Dolby Pro-Logic ("DPL"). Some movies will not provide very much surround information -- in fact, you may end up using your center channel very heavily (for dialog, etc.), your mains some for music soundtrack and sound effects, and your surrounds for a little "atmosphere." Also, DPL does not send a full-range signal to the surrounds -- no low bass and no substantial highs. Natural mode is probably one of the less objectionable DSP modes I've listened to (it was my fiancee's favorite when she was playing with the surround and DSP modes while watching TV and listening to CD's).

I guess the bottom line is that you seem to be doing everything right, but have discovered that DPL from video tape doesn't always provide a very immersive experience. If you like Natural more than surround for tapes, use it and enjoy it. But when you add a DVD player, pick up a digital audio cable (coax or optical, whichever your DVD player supports) and use that to connect to your 1050, then make sure you've got the 1050 set to "Surround" instead of Natural -- the difference between DPL and DD/DTS is impressive.