Now the burning question: Will connecting the WD Live to the WHS by a crossover cable (or switch) use the Powerline adapters at all or is it strictly a communication link between the two Ethernet adapters in each device?
So, if the WHS machine has one ethernet port and the WD device has one ethernet port, both of which will be used, with either the cross-over or cat5 feeding a switch, where is the homegroup come into play and where is that going to plug into? It's not going to come into play. You will though just need to configure an IP and Subnet mask on each machine (say 192.168.0.2 and 0.3 with both SMs being 255.255.255.0)
Now if you wanted some sort of internet connection to that WHS machine, you would connect the homegroup to the switch, however, you would want to manually configure your network settings on the WD device, so it doesn't use any gateway to talk through it and then let whatever DHCP service assign the WHS box an address.
I assume the WD device can stream from a shared folder, be it WHS, Win 7, or whatever OS you're using.
Speaking of USB, I do have the option of attaching a USB-connected hard drive to the WD Live. Once connected to the WD Live and the Live is connected to the network then the drive becomes accessible through the network. I could then move content to the USB drive over the network (even if it's slow) and then perform playback directly through the USB connection.
It'll just add space or it'll just use the USB drive. I'm not sure which.
and I don't know where you're getting a network from...unless you're talking between the WHS and WD box. You already said, you don't want to use the homegroup, and wireless and wired isn't an opton.