I recommend you pick up Adobe Premiere. You can get the previous version (CS3) and it will work fine for you. Just create a project file in the resolution of your footage IE HDV 1080i. Then import your clips and drag them to the timeline. Then export them to either a MOV file or an AVI. you wont loose any quality, and they will be in spec. From there you can compress, convert, or just watch them as is on the WDTV.
Another option might be Sony Vegas. Its cheaper, but I am not sure how it exports and how compatible it is with incoming movie files. I would guess that it would work however.
I was thinking about buying a Lumix HG1 myself. I have all Nikon lenses though and I am not sure how good the adapters are for it.