Im a very happy user of VLC, especially now that it actually skips to the point I click on, on the timeline, but Im still having a major problem when playing very high bitrate/frame size content, such as x264 1080p .mkv files, and some very high rate 720p .mkv files as well. The video tends to get blocky when there is lots of action, as if the PC is struggling to switch these huge frames so quickly. It plays just fine in Windows media classic.
My specs:
QX6700
2.5GB ram
Dual 8800gtx (not SLI)
150GB 10k rpm raptor (where VLC is installed)
RAID 0+1 array for media (off which the video files are being played off).
Vista Ultimate