Macgasm has an article on the new VLC version 2.0 breaking DVD decryption in handbrake! Luckily they also have a solution. Run this installer from the VLC web site, it will install the DVD encryption engine in a place that handbrake can use it.
Version 2.0 is a great upgrade, but the breaking of handbrake is not a good feature, lets hope they keep the installer available!