I've played several Xvid files from burned discs, and they've all played just fine.
On a related note, some of the files I've tried to play don't fill out to the edges of my screen, like its playing the file in its original resolution instead of stretching it out to fill the screen. Does anyone know if there's a way to tell the 360 to stretch or zoom the video out to the size of my screen?
yup, press A to bring up the controls and use the d-pad to go over to the right and you'll find a control for the aspect ratio. It has like 5 different options (zoom, letterbox, stretch, etc.)