I noticed this the other day after I got my Win7 and installed it, was watching some HD tv episodes I downloaded and a few films. I was left stumped wondering why the blocky pixels were there, thus did a google seach. It seems VLC 1.0.2 has some issues with the rendering in win7, VLC 1.0.3 seems to resolve this issue albeit still not as good as it used to be. I guess the final VLC release will be up to scratch as previous versions when released.
Never used WM12 or the latter.