Having been through this myself and like you very frustrated I believe I have found a solution to this problem and I wish WD would correct this problem.
I found that if you format the USB drive or thumb drive with a XP computer (NTFS) this will allow the WDTV to detect the drive properlly
I tried this with a number of drives from a small thumb drive to a 3T WD drive.
If the drive is formated - NTFS with a Win 7 or Win 8 the WDTV will not detect the drive.
The formating of the 3T drive on a XP machine took about 5 hours.
Good luck
