I've owned it since the summer of 2009, so my guess is 2nd gen. When i hit about it tells me wd tv hd media player fw version 1.02.07.
Latest firmware of the Gen. 2 is 1.01.77 --
http://www.wdc.com/wdproducts/updates/?family=wdfwdtv_hdSince you have firmware 1.02.07, then your unit is a Gen. 1 --
http://www.wdc.com/en/products/wdtv/I connect via hdmi 1.3 to a pioneer receiver then hdmi out to an LG TV.
When there is no sound using digital setting the pioneer displays mpeg-2-aac. When i switch to stereo, magically it plays the sound and the pioneer display says stereo. The few times that i was able to play digital the pioneer displays dolby digital.
It's been a long time since I had a Gen. 1, but if I recall correctly, the STEREO audio setting is for analog sound; HDMI setting is for digital sound. So if your connection is via HDMI only --- you will have no sound on STEREO audio setting, but will have sound on DIGITAL audio setting.
If you have sound even on STEREO audio setting, how does the analog audio pass when the WD is set to STEREO? Do you also have an analog audio connection via RCA, connected simultaneously with the HDMI?
If you have both HDMI and RCA connections, remove the RCA audio connections and test it. The simultaneous connection might be confusing the unit as to which output should be prioritized.
If you still have problems, you might have firmware errors. If so, you need to reset the device, or flash your firmware. I recommend upgrading to the latest firmware, since the unit should have its version's final firmware anyway.
See the Release Notes for the firmware installation procedure:
http://www.wdc.com/en/products/wdtv/