I did more digging on this one and have determined that the issue is
with VLC itself. I installed VLC 1.1.4 on Windows and I see the same
issue. But after I downgrade to VLC 0.9.9 (Which is equivalent to Ubuntu
Jaunty's VLC version), I do not see the problem. I have opened a forum
topic on VideoLAN to see if I can get help from experts over there.

-- 
[i945gme] Computer freeze for 5mn while watching a video on VLC.
https://bugs.launchpad.net/bugs/581496
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which is subscribed to xserver-xorg-video-intel in ubuntu.

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