The USB drive must be formatted as either NTFS, FAT, FAT32 or HFS+
I'm guessing you need to reformat the drive as HFS+, unless NTFS works with your Mac and you want to be able to use the drive with a Windows PC as well.
This is the manual for the WDTV LIVE though you didn't specify your model. It's probably the same for all similar models. Page 203 here:
http://www.wdc.com/wdproducts/library/UM/ENG/4779-705062.pdf
Page 206 also recommends turning off JOURNALING to compile the media.
*I actually turn off the Media Server function (I think that's the wrong name). There's a feature in the Settings that if enabled renames any TV or Anime shows I may have listed but screws up the order by listing 10 in front of 1 or something like that so I had to disable it and use my naming scheme which uses "01" instead of just "1".
Then the procedure is:
a) go to "VIDEO"
b) press the RED BUTTON
c) choose "Local Content"
d) choose the USB drive
I have the WDTV LIVE HUB with internal hard drive AND an external USB drive so I don't know if your USB drive would show up without doing this. You can also access computers remotely but it can be a big hassle.
Other tips:
Fully OFF requires you to hold down the Power Button for about Five Seconds until the white light goes out (on mine at least).
If you need any more help feel free to ask, I'm pretty knowledgeable about this device and videos in general including using Handbrake to recode or Mkvmerge to remux my cough cough legally obtained videos.
I ABSOLUTELY LOVE my WDTV and bought one for my parents and sister. For my sister, I converted many of her kids DVD's to ISO images so they play just like on a DVD player but are stored locally. I then set her up with Netflix.
I added a 2TB USB Elements drive (mine turns off and on with the device; not sure about other USB drives) and I'm also adding a WD Cloud 3TB drive to the network so everyone can share videos and backup to it.
*I should add that only USB drives with an external AC adapter work properly AFAIK, so 2.5" USB drives may not work or damage the device.