I don’t think I’ve ever had a smooth Ubuntu upgrade – and upgrading from Gutsy to Hardy was no exception. I found that when Compiz was running and I was playing music in VLC, especially with visualisations on, the sound popped and cracked. I’m no Linux expert but I found that if you force the system and VLC to use ALSA (mine was defaulting to Pulse Audio) it fixes it.
To set the OS to ALSA go to System > Preferences > Sound. In the first four dropdowns choose ALSA.
Then open VLC and go to Settings > Preferences and check the Advanced Options box. Expand the Audio section on the left and choose Output modules and then choose ALSA audio output.
And now the sounds works perfectly again.