Other than the minor problem of the AZBox not finding the HDD 8 or 9 times out of ten on a cold boot (requiring a soft re-boot to find it), my WD10EARS 1TB has performed well as far as recording/playback of recorded files, or those I have transferred to the drive.
I can find nothing about the compatibility of your WD with the AZBox, but tend to believe that if it recognized the drive, and you were able to format it, it should (and I stress "should"!) work.
To test the drive, there are a number of things you can do. If you have the AZBox connected to your network, you could FTP to it, and see what directories appear (/DATA, then /HDB1 should show about 10 directories including /MOVIES). You could then transfer a video to the /MOVIES directory and then play it back through the AZBox and see how it plays. Alternatively, you could put a video on a USB drive, and using the File Manager on the AZBox, copy and transfer it to the MOVIES directory, and then play it.
That will give you an idea whether the drive is compatible or not, and then you can decide whether to do the other steps mentioned, or replace the drive.