Okay... I figure that non-Slayers fans must be really confused at this point - who exactly is Xelloss, what is he, and just what the hell is he up to? So here, I will attempt a write-up on the fruitcake!
Who is Xelloss
If you haven't figured out yet, Xelloss is a Mazoku, yes! He's the loyal general-priest of the Mazoku Lord Beastmaster (Juuou-sama) who lives on Wolf Pack Island. So no, he's not lying when he says he's a priest. ♥ We'll get to his principles regarding honesty in a bit. Now, most Mazoku Lords create a general and a priest, so for Xelloss to possess the combined power of both, he's indeed a very powerful Mazoku - ranked just beneath a Mazoku Lord in the hierarchy. The human form that Xelloss takes is of course, not real, but note that this includes his entire appearance. In other words, his clothes and staff are a part of his 'body'.
What makes him different from other Mazoku
Slayers Mazoku, as Filia-mun has explained, don't bother to hide their auras since humans can't sense them. Also, they feel no need to hide their auras, as doing such a thing would indicate a lack of confidence, which in turn indicates a presence of fear. Fear cannot exist in a Mazoku; it defies their entire existence, and will ultimately destroy them. This applies especially to a high-level Mazoku like Xelloss.
Secondly, Xelloss's true form does not lie in the physical plane, but in a separate one called the astral plane. As such, physical attacks will not hurt Xelloss in the least. He may look all beat-up and bruised, but that's just him having a little fun. Spells may or may not have an effect on Xelloss, depending on their power and which plane they're attacking.
Xel's motives
Xelloss's primary motive for coming to CFUD is to investigate the population of undead, as well as the auras or rumours of Mazoku and demons in the camp. The more he learns of these other Mazoku, the better; hence the rather unsubtle poll screaming "HAY MAZOKUS COME PLAY WITH ME".
The rest of the time, Xelloss enjoys playing with the humans, simply to feed off any negative emotion they might give out.
Principles
My interpretation is that Xelloss follows three simple rules:
1) Never lie.
No really, he never does lie. Half-truths, words that make you assume otherwise, but not complete lies. Whenever he's stuck with nowhere else to go, he tends to fall back on his infamous line - "it's a secret". Interestingly, I don't think I've had to use that line yet. XD
2) Do unto others what others do unto you.
Be civil to Xel and he will gladly return the favour with hearts once in a while. On the other hand, if you decide to insult him in a manner that even he, as a Mazoku, does not find complimentary (eg. Filia calling him 'garbage', Kudou calling him 'stupid'), you will be on the receiving end of his biting sarcasm.
3) Collect angsty/angry playthings.
There are exceptions to the second rule. That is, if you happen to show great dislike for Xelloss without actually having insulted him (eg. Rey's oozing amount of distrust, Rikuou's cutting remarks), congratulations... you're now on his list of replacement Zelgadiss toys. He will enjoy riling you up as much as possible to feed off the anger that results from that action.
I hope this helps in some way? If you still have questions, just drop me a message and I'll get to you asap!