VLC video converting for Xoom
You can try Handbrake - a multiplatform open-source video transcoder. It has quite user-friendly graphical interface, and supports different device profiles (you can roll your own as well). As to what settings to use on your Xoom: Here someone managed to find the correct settings to make their Xoom play the transcoded video. 

Some extra googling would probably give you additional information how to set the device profile in Handbrake -- seems a lot of people are trying to transcode video on this tablet.