So VLC 2.0 is out and with touted features like Blu-ray playback, but it still has problems handling certain HD (e.g. 720p) files - like MKV for instance. What you can do is to go under “Input & Codecs Settings” in Preferences and set “Video quality post-processing level” to 0. Max is 6 and yields better picture at expense of processing power, and you can also try enabling GPU acceleration as well. All this can help especially for older hardware, if not - try taking a look at these alternatives like MPCHC and Splash.