Live if you were to use the controllers yellow wire. Is there any way to solder it to pin 2 on the front panel...and then somehow make it so this button can send a signal through the yellow wire to the Xbox? I think this would be pretty cool since I'm not using Xbox Live anymore.

You could change the button to connect to that instead, but you'll lose any XBL functionality.

but wouldnt the headset button need to be connected to the 3.3v standby power somehow, even if its inserted into the controller?

Just use the button in the card exactly like the memory card reset button tutorials.

Check the tutorials. There is one in there for what you are looking for.