I posted my answer here:
viewtopic.php?f=2&t=41102
Hi, all. I'm not sure if this is still an issue, but I've resolved it. After several failed vlc conversions resulting in warped and/or static-y mp3 files and a bit of tinkering, I was able to create mp3 files that actually played. Here's how you do it:
1) Go to Preferences (Under Tools menu) and find the Audio menu. Under 'Output', switch the type from Default (or whatever it's set to) to File Audio Output. Set the destination, file name and extension - I used .mp3 (this won't be your finished file -it still reads as flac, even though the extension says its not-, so don't worry too much about the title). When you're done with this click Save.
2) Under Media, click Open File and choose the flac file you want to convert (I'm not sure if you can use this method for playlists or entire folders yet, creating one big file, but it might be worth trying -although casual observation implies that it probably wouldn't work), and then click Play. Unfortunately, I know of no workaround for the fact that you have to wait while the file plays. (By the way, you shouldn't hear anything while the file plays, it's output is not supposed to be audio, instead, it's writing to a new file. If the file plays as normal, then you haven't done step 1 correctly.)
3) When your file is finished playing, go back to Preferences and change the output back to default (this is very important!). If you don't do this, then as soon as you open the new file it will overwrite itself.
4) Go back to Media and select Convert/Save (or key combination Ctrl+R). Find the file you've just created (the output file with the proper extension, that is) and click Convert. Near the top check off the box next to 'File' and then give it a filename and a destination, along with your desired extension - make sure this corresponds with the extension under Profile. Then click Save. The resulting file? A real mp3!
Yes, it's clumsy, but as far as I'm concerned, it beats downloading new software. And it's a heck of a find. I didn't think VLC could pull off this conversion!
Cheers!