This is a repost from MAC version of VLC (I use Windows 7) on another thread.
I had this issue and tried something I thought might be related as a fix, and saved this thread to post to in case it worked. I think this may be more about the drive than the software, but obviously the software is part of it, as the issue is not apparent in GOM Player (only used it last night for limited testing). I have a Western Digital Green WD20EARX drive. That drive and many other Green and Red drives from WD have Intellipark which by default forces the head to park after 8 seconds of no "activity." They also usually have 64MB cache (may or may not contribute). This combined with VLC playback could account for the head parking often, and the time taken to move the head back to position could be causing the issue. I had the files on a WD Black drive with no issues. I dumped them onto this WD Green drive (Fantom warranty replacement/!downgrade!) and the problems began. A full defrag didn't change the issue. The video would at different intervals, especially when unpausing, go into the grey, embossed-like imaging shown in the first post for 5 to 6 seconds, then correct. Throughout playback, there would also be frequent moments like this that only lasted a second. Trying to duplicate the "bad spot" proved impossible as it would play fine the second time.
This also is something interesting to try if you think it's not stupid of WD to use this technology: open Crystal DiskInfo tool and look at the SMART data for a green drive (I have "10 [DEC]" setting in the menu under "Function, Advanced Features, Raw values"), select another drive, then go back to the Green drive after about 8 seconds. Notice how the Load/Unload Cycles count is higher (didn't do that for the non "green" drives you may have, did it?). That's just from SMART being accessed. Think about how often it will happen from opening explorer or a file dialog... get the picture? I have an almost 5 year old WD Black drive with Load/Unload Cycle Count of 1405 and this Green drive powered on for less than 2 weeks has 1407 from rare usage (2 days of accessing files for maybe 2 hours total and noticing the VLC issue). That would have ruined this drive within a year without the fix. It was at 1350 the night before I applied the fix, and I did not directly access the drive or files in explorer, etc. between those times. It's been at 1407 since.
My solution was to use WDIDLE3 as detailed on this youtube video
http://www.youtube.com/watch?v=J2eYyRI_F98 (with link to the custom UBCD used below the video). It's not the best video, I'll agree if anyone says. Would have been nice for him to pull back from the screen enough for us to actually read what he was describing. But maybe it will help enough to make it through. You will have to make a bootable CD/DVD/USB stick from the iso file listed under the video. Make sure to power down/power up the drive after changing the setting or it will act all weird (turn off the drive, then back on, if powered by the PC's power supply, just turn off the PC). Also make sure you ONLY have the WD GREEN/RED DRIVE(S) hooked up when you do this. This issue (Intellipark) does not effect BLUE or BLACK series drives, and the software does nothing for other brand HDD or SSD, but could mess up other drives if attached. This fixed the issue as far as I can tell from the few hours I've watched since the change. I have no idea which specific models work/don't work with this fix, so don't ask. I will not revisit this thread unless I want to add to or amend my post. There is also a way in Linux to do the same thing. Do a search if you prefer using in Linux. If you are using another brand of hard drive, hopefully a search will give similar fix.
I've tried everything from updating to reinstalling to updating my display driver and canceling all lags on performance, even Aero on my Windows 7 (64-bit) but nothing has helped. I've also been getting this issue of my audio falling into a loop when the video track glitches and it sometimes falls back into normal audio but then through the rest of the video it continues to happen, either with the previously looped audio or a new bit, and then usually when I try to exit out VLC freezes on me.