I have not used windows 7 but are you able to change your autoplay to use vlc? i.e. right mouse click on your dvd icon choose properties > autoplay, then select dvd movie and choose vlc to play as default.
I am using an old m100 Toshiba Laptop running windows XP SP3, whenever I play flv files I get a yellow stripe down the middle of the screen, not on mp4's, avi etc just flv.