Media Library must be ON to display the watched icon.
scroll down the page: http://community.wd.com/t5/WD-TV-Media-Player/How-to-Mark-viewed-videos-and-episodes/td-p/790239
EDIT: just saw your response at that link … it should work, it does work … just retested it now (plugged a 500GB USB into the front usb … Media Library ON … watched icon displays fine)
describe what you’re doing (or not doing)