From DSL Wiki
This file contains the names of files and directories to be included in a backup archive. If a directory is listed, the directory and its contents will be added to your backup.
The default file in DSL 3.0 looks like this:
opt/ppp opt/bootlocal.sh opt/powerdown.sh opt/.dslrc opt/.mydsl_dir home/dsl/
This file will add everything contained within /home/dsl, with exceptions listed in the .xfiletool.lst file.
Be careful not to leave any spaces or Carriage Return at the end of the file as it will result in an error when trying to backup .