actually VLC is so, so, you want "the sheot" get mplayer/mencoder on linux, that can do just about anything, many things VLC wont do
there is a version of mplayer/mencoder compiled for windows using cygwin, and it does work, but there are some features missing that only can be done with linux
As far as why does the picture get bigger and look better on a TV, the reason is quite simple, the number of horizontal scanlines on a TV is fixed and stays the same regardless of its screen size, it also in effect hides alot of errors so to speak, you cant see what it wont show
On a computer monitor its done a bit differently and monitors have vastly superior resolution.......so typically the picture gets expanded to fit it which causes pixelation and other issues, most of which can be very well hidden or masked by a good quality player and decent source. The harsh reality is, TV's suck, and suck BAD compared to a PC monitor, problem is, the source for video isnt very good either. DVD resolution is only 720x480 or 720x576 depending on where you live. Even HDTV doesnt add that much as the ultra hi res stuff promised by the industry a year or two ago still doesnt exist, and its looking like it might never happen.