Well based on some replies I found I un-installed version 5.1.2 and installed the older 4.4.18 and EVERYTHING WORKS!!
So it's definitely some weird bug in the latest versions of the software that makes the Xbox not recognize the xvid files as valid formats. Strange. But I'm happy now that I can play all my media.
Hopefully this issue gets addressed in a new release but for now I'll stick with version 4.4.18