I found this under bug reports and a solution posted there:
"Just done some testing today and come up with a working per-user method, which
I recommend now rather than my previous efforts. Sorry about the confusion, the
tests could have been better,

After following these instructions, you will have two alternate entries in your
context menu "Open with" list and the file properties "Open with" list, so that
you can open VLC with the standard command.

To change the default DVD player in Hardy to VLC, open the Terminal and copy and
paste this command into it:

gksudo gedit /etc/gnome/defaults.list

Press "ctrl+f" and search for "x-content/video", then change the "totem.desktop"
entries to "vlc.desktop". Close and save.

Next, right-click on "Applications" in the top panel and select "Edit Menus" to
open the default menu editor. Navage down to "Sound & Video" in the left pane,
select it, then right-click on "VLC media player" in the right pane, select
"Properties" and change the launch command from "wxvlc %F" to:

vlc --vout-filter deinterlace --deinterlace-mode blend --volume 512 --fullscreen
%m

Close the VLC properties dialog and exit the menu editor. Finally, navigate to
Places>Home>Edit>Preferences>Media>DVD Video and select VLC."

This worked for me and was not as hard as it sounds. The file editing is
straight forward text editing. The menu editor can be found in System |
Preferences| Main Menu. The last step is the most confusing. What you are doing
is going to Places | Home Folder. Then in Nautilus going to Edit | Preferences.
Media is the last tab.