Did you install xine yourself or did you install it with your distribution?
a few distributions use a gimped version of xine that will not allow you to watch DVD's since the CSS for linux is legally questionable. If you install xine with your distro cds try installing it manually. One other thing Iv found is that some versions of libcss that can be found on the internet are corrupt mostly the RPMs so you may try finding a new copy that is a tar.gz and reinstall it, I installed something like two or three different versions of libcss before I found one that worked, unfortunately I no longer have the website I downloaded it from.
As for setting up your DVD device, go into the setup, under the main tab set your permissions to "Master of the known Universe" click apply (you have to click apply after you finish changing things for each tab, if you change tabs before clicking apply your changes will be lost) then click on the input tab and there will be an option that says "dvd_device" insert the path* to your dvd drive press apply and you should be good to go.
*note if your using a DVD/CD-RW drive the path may be /dev/cdrecorder and not /dev/dvd