I finally fixed it on my system. I was using a program called Transbar that made my Start bar semi-transparent. I finally discovered, that when it was enabled, I would get a gray screen, instead of video, when using the DirectX output (might be the default output too, I don't know).
I had reinstalled drivers, and reinstalled DirectX....which didn't fix it. I had removed VLC completely, still didn't fix it. I even switched to the latest nightly build. I could "work-around" it by choosing a different output mode, such as DirectX3D, OpenGL, and GDI. But I finally thought of what I had done the day it quit working. I had installed a new visual style and started using the Transbar program to change the appearence of my Start Bar.
Perhaps some of you that are having the same problem are using something like this also. Although, maybe VLC needs something fixed too, since no other player was effected by it.