Any ideas why "size" is being ignored?

As for the buffer errors: I've seen similar buffer errors with other camera-related programs, especially mplayer. I would say that all of the programs that use the camera (even gstreamer) struggle with the "missing frames" problem. I would love to see a patched kernel (I guess fanoush is the go-to guy for that), but I hope that a maemo version of VLC has some kind of workaround, since most people won't have a custom kernel.