I usually play AVI with DVD resolution.
I noticed that the WdTVlive does not show any progress bar/position in the file at all. (My old Trekstore showed this without any problem)
I tried an MKV 720 and it worked okay (without pb of course)
Then I downloaded some of the apple movie trailers in 1080 and I experience stuttering and drops while playing. It is reproduceable: When I play the CLASH OF THE TITANS #1 trailer it plays okay until that big scorpion tails waves through the picture. Than the picture stutters and the audio is gone. Same with other trailers and happens also in previemode!
(WDTVlive with .11 connected to a Hitachi 500GB 2.5 drive on USB1)