I solved it!
Apparently, the Samba network protocol, which is used by WDTV for network sharing, does not support high bitrate video streaming. The workaround is using a media server program, then accessing full HD videos through Media Server option on the WDTV. I would recommend installing PS3 media server, it's free and IMO it is great, it understands WDTV automatically without any problem, and also the video reproduction is very smooth, and the libraries look quite decent.
Interesting thread here; especially above with WD FAQ link.
As anyone with a Win7 PC knows, the Windows Media Player (WMP) within "comes out of the box" setup as a media server and our WD Live players see the Win 7 PC that way and as a Network share.
But, what about an XP or VIsta PC that only shows on the WD as a Networlk share and not also a server? I never used the XP machines to play media through a network until I got the WD and had to set up the home network more completely to share and all. So what did I know about WMP except elementary stuff. Heck, I have iTunes to play my music anyway!
Well, there is a way to set up the older PCs as a DLNA media server. I just found this link:
http://www.agoraquest.com/viewtopic.php?topic=35037&forum=70 and followed the instructions there, and now my XP machine is a media server, too; WMP found the WD player and added it to a list, and the WD now sees the XP machine as both a share and a media server. I will have to explore this new discovery to see how it can help.
Interestingly, the tab in WMP you click on to set up with is called "media sharing" (not serving) so the help file of WMP wasn't to helpful when looking up "media server": but there are lots of help tabs there under "media sharing" to read through for more info.