First up, good two pass encoded xvid/divx files look great. No way are they 'crap' quality. I have a fair few and they look particularly good playing on the WDTV through the hdmi port into our plasma tv.
My WDTV isnt slow to react. It's not ligthning fast but it's certainly a lot faster than 1-2 seconds. Someone else on the thread said it was faster than the popcorn hour.
To view a slideshow you need to press the play button, not the enter button. It works fine. It amazes me that you're suggesting it doesn't when it's a simple, well documented function.
To view the files in a list format, go into the setup page and select list format. Again, It's really not hard.
Probably the best advice I could give you is RTFM! It's all documented.