I've reproduced this both home and at work now: using Softsqueeze, I have a playlist made up of local songs, then I add an item from the Podcasts plugin and move it so that it is sandwiched between two local tunes.  What happens is that when it gets to the podcast item on the playlist, the display SAYS that it's the podcast, but what's actually playing is a horrible stuttering version of the next LOCAL song that's on the playlist.  SqueezeCenter also says that the currently playing track is the podcast.

I have not tried this on the Squeezebox itself, I will try to do that tonight and update this bug with my results.  This has happened on two different laptops using newly installed versions of SoftSqueeze from the SqueezeCenter 7 installation.

In my specific configuration, SqueezeCenter is running on the latest version of XUbuntu, and both laptops are running Windows XP Pro.  This happened both from inside my home network and also at work.  Certainly in the past I had playlists like this all the time and never had a problem.

Update: I just cleared my playlist entirely and added a podcast...it is stuck on Now Playing (Connecting...).  I closed Softsqueeze and restarted it and got the same thing.  So it looks like SoftSqueeze won't play a podcast, even though I can play it from other media players on the same PC.  I tried this just now with podcasts from twit.tv, podshow and NPR, all to no avail.

Again, I'll test all of the above on the Squeezebox tonight.