VLC uses its own codecs, so far as I know. Even though VLC uses its own codecs, it will try to use directx or OpenGL (your choice) to output the video, so if you're getting a gray screen, it could be a graphics driver issue. Have you tried using a media player other than VLC or iTunes? (The framerate issue on iTunes leads me to believe your graphics drivers are not properly configured or installed.)
What computer are you using? Please list the specs and other relevant information. Is your computer home-built, or built by an OEM? (Dell, HP, Gateway, etc.)
Oh yeah, I just remembered. If VLC doesn't have a codec for a file, it just won't try to play it at all. So if you play a movie, and it doesn't have the right codec for the video, it'll just play the audio only. In other words, the window won't even have a gray screen - it'll just show the controls as if you were playing an audio file. Anyway, if you were using Linux or Mac OS X or BSD (or some other OS), I would recommend mplayer with a front-end or VLC. However, since you're using Windows, I don't think VLC is the best solution, although it's good to have it installed anyway. You might just want to get some kind of DirectShow codec pack (k-lite, CCCP, etc.) along with the latest drivers for your graphics card.