Windows 7: Weird video playback issue!

So im having this weird issue. Hope someone here can help

When i play a video (any format) in VLC it works just fine, but when i try to make the window smaller than the original size of the file i get lines, like a grid, over the picture and the colors get messed up. When i drag it back to original, or larger or full screen, size its back to normal.
Another issue that might help point to the cause: when i play a video in WMP 12 (avi, mov, wmv formats) i get the first frame of the video in a small square in the middle of the player, sound works just fine, but its just stuck on that first frame! When i play MPEG format i get "Windows Media Player encountered a problem while playing the file."
When i play the winsat.wmv file i get "Windows Media Player cannot play the file because there is a problem with your sound device. There might not be a sound device installed on your computer, it might be in use by another program, or it might not be functioning properly." which is even weirder because my sound works just fine!

Anyways ive already tried updating and reinstalling to latest nvidia drivers, ive tried the sfc/scannow (no issues were found there), ive tried resetting settings and reinstalling vlc, tried to turn off overlay and tried the various video output options people were suggesting. Also tried a few of the popular codecs packages. Nothing made a difference.

One thing i noticed is when i turn off "video scaling" the video is fine when i make the window smaller, but then again the actual video is not being changed since scaling is off.

Also, another error i get when i try to refresh Windows index experience i get this message: "windows experience index could not measure video playback performance"

BTW everything was working just fine up until about 2 weeks ago, the only change that caused this that i can think of is some recent windows update/ But ive looked at the recent updates and doesnt seem like there was any update that can be related to this...

PLEASE any help would be appreciated this is driving me nuts! Cant think of anything more to try or what might be the cause of this!!

Thanks for any help to come!

specs:
asus S73
intel i7 2630QM
windows 7 64bit
nvidia gt540M

Update your video drivers

Note:
The word d-r-i-v-e-r disappears from my posts when I log out.

I know you said that you updated your NVidia d-r-i-v-e-r, but I'd consider trying to update it again.
Did you choose the "clean install" option?

I always have trouble with NVidia updates.
Recently I tried to update XP with the latest d-r-i-v-e-r and it hosed my Windows 7 and XP operating systems!
I couldn't boot into either OS, even using the various "Safe Mode" options.

With some trepidation I tried updating it again (a couple of days ago, using the same installer) and it worked perfectly.

Yes ive tried a clean install. Tried uninstalling and installing again, twice. Nothing changed

Try re-enabling UAC to its default position.

intresting idea ... how will that help?
ill give it a try!

tried defaulting the user account settings .. no go ..
anyone have any idea why i get "windows experience index could not measure video playback performance" during the "assessing windows media decoding performance" stage of refreshing my WEI? ... i have almost 30 gigs left on my ssd.

It sounds (to me) like it might be some sort of hardware problem.

Are all of your cables and components, properly seated (not loose) in your machine?

its a laptop.. asus n73.. i did replace one of the HDDs with a SSD but that went smoothly and these problems were showing up before that ... i was also thinking something happened to the video card, but id really like to think it didnt :/ ... is there any software you recommend that can find a hardware or software malfunction with the video card? like a stress test or something?

Have you checked the manufacturer's website for software tools?

The problem only occurs with video playback?
Can you resize pictures without problems?
Windows Explorer (or other software) doesn't glitch if you resize the window?