1. Create a shortcut with nothing after VLC.EXE, IE no options.
2. Go to Preferences, Interface, General, WxWidgets and be sure the "Embed video in interface" box is is unchecked.
3. Go to Preferences, Interface, Control interfaces and check the box marked "Interface showing control interface"
4. Go to Preferences, Video and check the box marked "Full screen video output".
When you open a file it will open in full screen and when you move your cursor to the top of the screen the interface will show up. clicking anywhere on screen and the interface will disappear.
Alternately you can:
1. Shrink the WXWidget controls in Preferences, Interface, General, WxWidgets and check the "Minimal interface" box. (no tool bar and menus)
2. Minimize the video panel size in Preferences, Video under General video settings scroll down to "Windows decorations" and uncheck the box.
Then don't forget to press "Save" and close the player for the changes to take effect. You didn't say what version of VLC you are using, but the new version 0.8.5 sizes the player or window to the video rather than the video to a fixed window or player and it is easier to change the size.
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If you end up doing this choose the smaller of the two files as it is the install version. Don't forget to uninstall the old version first in your Control Panel's add/remove programs.