Strange, the Xbox 360 dvd player should be able to handle DL pretty easily. Does this occur with all your DL discs in the 360?
Since Fall 2008 the Xbox 360 can play Divx and Xvid movies easily.
Just convert your movies to one of those formats and your good to go.
You can even start up Windows Media Player 11 on your pc and share some of your mp3's and movies (wmv, xvid, divx) to the Xbox 360 via network lan.