1. You can use the AirPort Express as a bridge for your network. Both of your WAPs should have unique names but the same SSID & password. I don't have a wired network to test this out on, so let us know how well it works.
2. Yes, you can do this. However, what will actually happen is: the music will stream from the computer in the basement to the PowerBook, the PowerBook will encode the music as Apple Lossless and encrypt it before sending it to the AirPort Express.