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I am having the same problem. The subtitles look fine in DVDsubedit. I Deleted everything in appdata/vlc and that did not fix the problem. I am running VLC 1.1.4 on Windows 7 Ultimate 32bit.
I've encountered the problem again. It looked fine in Windows Media Player. I disabled transparency. Here is what came to the log file when i turned on the subtitles
main debug: VoutDisplayEvent 'mouse button' 2 t=8
main debug: VoutDisplayEvent 'mouse button' 2 t=9
main debug: auto hidding mouse
main debug: control type=13
main debug: looking for decoder module: 34 candidates
avcodec debug: libavcodec already initialized
avcodec warning: refusing to decode non validated subtitle codec
main debug: using decoder module "spudec"
main debug: TIMER module_need() : 3.789 ms - Total 3.789 ms / 1 intvls (Avg 3.789 ms)
main debug: looking for packetizer module: 21 candidates
main debug: using packetizer module "spudec"
main debug: TIMER module_need() : 0.490 ms - Total 0.490 ms / 1 intvls (Avg 0.490 ms)
main debug: thread (decoder) created at priority 0 (../.././src/input/decoder.c:301)
main debug: thread started
main debug: auto hidding mouse
main debug: auto hidding mouse
main debug: control type=1
main debug: auto hidding mouse
main debug: auto hidding mouse
main debug: auto hidding mouse
I am experiencing an identical problem, with an identical avcodec warning about using a non validated subtitle codec. The problem occurs in Win7 32bit and on Mac OS 10.5 (latest update).