Go into the video section and check my video apps. go to video player and select mixed media disc (or whatever the disc icon is). Then you can go in and select the files on the disc.
Please note that the 360 is a bit picky on the file types it will read. Just because it might be a divx/xvid or h264 file does not necessarily mean it will play all of them. If they have too many reference frames or are the wrong profile it won't like them.
But you can't play it from the main tab like you can a regular dvd. Go into the video tab and select my video apps and select video player and you can access them there.
(this is assuming you have the latest dashboard update. I think the slims came out with these already installed. But if you are online a lot you probably have already updated to it)