This forum is for the WDTV ‘Live’.
The WDTV 1st Gen player forum is here:
There should be WDTV owners there who can better advise you. The ‘Live’ uses a completely different firmware, 1.01.17 (which, incidentally, has an audio lag bug on MP4 files, not present on WDTV 1st Gen players).
Try posting more information about what software you used to convert your files, what audio codec you selected (H264 is the video codec) and also what the files were before you encoded them (container, codecs, etc). It could be an encoding issue, not a hardware one.