VLC playback pixelated

[CrankCase]

I used VLC previously in Windows XP and it was great. However, I'm now using it in Windows 7 (64-bit) and the picture is awful - it's too pixelated when playing movies. When I play these movies in windows Media Player they look good, but the look complete crap in VLC. I'm using VLC v 1.0.1 Goldeneye. I tried to check for updates, but ebven that feature doesn't work properly - it says "An error occurred while checking for updates..." Terrible. How can a previously good app have gone downhill in such an appalling fashion?

[Lotesdelere]

Disable overlay and/or change video output module.