flashing the optical drive is where you put a new firmware on the drive. there is a site you can go to get the region free firmware and the flashing utility for OS X to do this, but like i said with flashing the optical drives firmware (DVD drive) to unlock it to region free will void any warranty you might have for your computer, and if something goes wrong with the flashing process it might kill the drive to where it might not be reversible and never work again, and if that happens you will have to buy a new drive to replace it cause trying to flash it will void the warranty and Apple will not cover it cause they do not support this. but if you use all of the user changeable region settings on the drive it will hard lock and will never be able to be changed again and never able to be flashed to a region free drive cause its hard locked to the final region change.
if you want to try and chance it everything you need is here
http://lasvegas.rpc1.org/ the link to the forums is also in the link, but before you even attempt to try i would advise you to study up on it on how to use the flashing utility and what firmware you would need and what can happen if things go wrong. as stated on the site, All software on the site is provided without warranty. All risk is that of the user. i am not 100% sure if the optical drive in your computer is flash-able or not you will have to study up on it or ask questions on their forums to find out if it is supported.
basically how your drive is now (with its stock firmware) will not read DVD's from other regions cause the drives firmware prevents it. VLC only allows you to play DVDs from any region only if the firmware on the drive is unlocked to region free. VLC will also allow you to play a DVD from another region if you use one of the user changeable region in the drives firmware but you will have to waste another to set it back to the default region if you want to view DVDs set for your region.
since my DVD drive (pioneer DVR-110D) in my Mac is stock region 1 (i haven't tried to unlock it) i cant play DVDs from other regions. i don't want to take that chance on killing my drive if the flash goes wrong so i didn't attempt to unlock my drive.