Welcome to the forum!
As for the "SD card issue", I am not sure what is up, there must be something different about your Xoom.
I have a microSDHC card installed in my unit and I can download updates and new apps and they install into the internal memory just fine. BTW there is no problem with the internal memory being listed as 'sdcard', it is only a label.
As for the format of the card you insert into the Xoom have you tried formatting it to FAT32?

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