I tested playing an AVI (or was it a DivX) movie including subtitles and that worked too. The keyboard is very much needed in the beginning while selecting files for the playlist. In full-screen play mode the Apple remote works OK.
VLC has about a quadrillion options and I wonder if it would be possible to run the whole thing in some full screen mode that would be better suited for controlling using a remote. Either directly or using some sort of plug-in?