I have the same box, and I experienced the same effects when the audio was DTS or AAC (although I believe both are supported with the newer models). To fix this, you need to get yourself mkvtoolnix and MKVExtractGUI. You'll also need an AC3 encoding tool (there are too many to list, but it is trivial to find one - I've used aften in the past with success). You can also use an MP3 codec, or anything else supported by the WD box (I only used MP3 and AC3 with my older one).
The basic process is as follows. Use MKVExtractGUI to extract the audio stream from your MKV file. Then, use your AC3 or other encoding tool (along with the proper channel mapping and bit rate, sampling rate, etc...) to re-encode the audio.
Finally, use mkvmerge (part of mkvtoolnix) to merge your new audio stream with the MKV file. You can also remove the old audio stream if you want, all in one step. All you need to do is open mkvmerge, drag in your older MKV file, and you'll see all of the streams. Then, add in your new audio stream, and check all the streams you want in the resulting MKV file (you can keep or discard the original audio).
Save it up, and it should work like a charm.
Why you need to do this: newer WDTV Live boxes come with built-in AAC and DTS decoding (as well as AC3 and MP3), so they cover pretty much all the audio codecs you'll need. The process I listed above can be automated (I wrote a script to parse all my MKV files that had AAC and DTS tracks), although I agree it is tedious. Your only real option, however, is to get a newer WDTV Live box, or manually re-encode the audio tracks yourself.