I have finally set up the WDTV for my friend. It took some time. I will explain why.
He had only one portable EXT 2.5" HDD with HD movies. WDTV simply would NOT recognize this hard disk!! When I opened the HDD casing I found out that it was an IDE HDD. So maybe it is NOT supported by WDTV? This was the only logical explanation I gave myself. Anyone with more info on this one? MBR?
Then I connected my EXT 1TB SATA 3.5" HDD and everything went fine. I could also connect my USB flash drive successfully.
Then I played the HD movies. First impression was good. The PQ looked similar to my Elektron. (Very soon I am going to compare the NMT (my Elektron) and WDTV, connected on different TV inputs (and same settings) and playing the same movie/ scene, to check out the PQ/SQ differences, if any).
We needed to connect WDTV to external DVD ROM. This was very important, because like me, even my friend has most of the HD MKV movies burned on DVDs.

But as you maybe aware, this is NOT supported by WDTV. (Did they think everyone will buy only WD EXT HDDs, for God's sake!)
So to do this, the next step was to flash the unofficial firmware with WDLXTV version
B-RAD WDLXTV - enhanced WDTV firmware
We flashed with latest 0.5.3. But it simply would not take the external DVD. It would simply hang at the starting WDTV logo. One must also remember that we cannot connect only the DVD drive here. Because the DVD is NOT officially supported, we need to have a supported HDD or USB drive already plugged in the other USB port of WDTV. Otherwise if only DVD drive is connected, it will show "No storage present" and then we cannot browse to "Video folders". We also need to keep the media library "on" for this purpose.
But anyway, nothing was working, then we looked up a forum where one guy had reported similar problem and he could solve by flashing the earlier WDLXTV version 0.5.2. it worked for us too!!
So now we could browse to Video folder and select CD ROM, and voila! we could play the MKV from EXT DVD writer. It played smoothly. No problem. Though I still need to try with higher bit rate 1080p movies.
It was not easy to source a reasonably priced EXT DVD writer. I had experienced this even last time. With not much available on Lamington Road, I had luckily got mine (LG 20X) from Croma for 2K. But these were no longer available. They only had the slim variant for 3.6K. Lamington road could only offer Enter (Chinese) for 2.5K, LG Slim 3.5K, Lacie Slim for 4.3K and Lacie 5.5" (22X) for 3.9K, which we finally bought.
Shall keep you posted with my shootout, coming very soon.