More details on exactly why it was removed from the App Store can be read here.
The good news is that it has now found a new home, at rpetri.ch/repo repository in Cydia. Simply add http://rpetri.ch/repo as a source in Cydia to download VLC for iOS for free.
You will, of course, need to have a jailbroken iPhone, iPad or iPod touch to install it. Follow our step by step guide posted here to jailbreak your iPhone, iPad or iPod touch with Redsn0w on iOS 4.2.1, or with Limera1n on iOS 4.1 if you haven’t already. (via The Readers Eye)