Wow guys, I didn't expect to hear from so many of you. I really appreciate it and apologize that I cannot reply to every one of you individually.
I'd like to clear a few things up:
It's not possible at this point to have Steve move out. He's in a lease with us for about a year. I generally allowed him to move in because I was expecting the NRE to die down and for her to see her situation more accurately. I did this with the advice after talking to my wife and one of her friends (the only other person who knew about it) Everyone expected the NRE to die down. That's part of my concern. I'd figure that 4 months later it would have.
As for the sex, I don't have a problem with her sleeping with someone she has feelings for, rather it's the fact that I'm not clearly "her man". It's the checkmark vs. the V formation. I've never loved anyone other than my wife and child. Not my parents, not my friends, no one. I wish I had more love in my life, but I don't. I'm certainly open to it, it just hasn't happened. But I'm very happy for my wife loving as much as she does. I actually find it preferable that she sleeps with people she does have feelings for, just not when it becomes feelings that are so strong as to threaten our marriage. I forgot to add, one of the rules (which I don't suppose many here think will be a good idea) is that if she does do anything sexual with him she has to tell me.
As I see it, Steve doesn't deserve my wife. I recognize that isn't my call to make though. How she could even entertain the concept of putting us together as equals to her is insulting. It makes me wonder why I went through all I did to marry her if another guy can just waltz into our life and win her heart just as easy. It's also again extremely frustrating to know that he wouldn't have allowed her to be with anyone else if he were her husband, yet she can feel just as strongly for him.
We do have pretty open lines of communication, but Steve is left out completely. He is my friend, and if he knew this is causing any marital strife he'd stop sleeping with my wife. My wife claims her dissatisfaction with our relationship is unrelated to him (and to some degree she is right). But she does have something of an artificial relationship with him. He gets to be low drama because he doesn't have any expectations. Effectively, there's no talk of love or a relationship being being friends who have sex and he has no one sleeping with HIS wife. So he gets to stay fun while I get to be the guy who is being practically bi-polar with his emotions. I think this again puts me at a handicap.
My failures have been many here. She feels neglected. I haven't made much time for just us. I didn't feel the same way she did. I can be sitting down doing schoolwork and watching my wife cook in the kitchen and feel an intense love for her. She, on the other hand, needs to be doing things together. I have to correct this. She says she doesn't feel connected. I have to figure out how to reconnect. We've got no money to go out and do things or have our child watched since I'm raising a family on GI Bill. I watch our kid a lot to give her time for herself, but she says that just makes me a good dad, not someone she feels connected to.
All is not lost, she says she loves me more than Steve, just that she's "in love" with him and not me. This is emotional torture, especially with him under the same roof.
I recognize many of you think I should just worry about my relationship with her and not concern myself with her relationship with him, but it isn't that simple to me. The checkmark is non-negotiable. I'm not a monogomous guy (well in practice I am because most women bore me), but I am more so this way than her. It comes down to your home team. When the chips are down and you have one person in this world you can rely on, it's always one person. I just cannot grok the concept of feeling equal emotional attachment for two people. I mean, I would be fine if she loved or was "in love" and sleeping with 5 boyfriends, just so long as she believed and I believed that I was her man.
Again, I deeply appreciate all of your comments. You guys are actually helping out quite a bit here.