Your note really helped me. I'm trying to WDS with two brand new apple base stations today - no third party hardware - and failed to figure it out. The manual didn't clarify, for example, that I needed to have the same network name for both devices. Even with those matching and passwords matching I couldn't get them to connect.
Your suggestion to start with a network without any password and see if that works first was really great and it worked for me. Ah the glory of seeing two green status lights for once. Then I knew my earlier problem was some security concern.
Once I setup the WDS without a password on the network, and tested that it was working correctly, I was able to then add WPA security to the network and update both base stations and they then continued to work. Why they wouldn't connect before with WPA I have no idea, but that was a good incremental approach and it seems to have worked for me for whatever reason.
I guess setup of these devices is something I will do very rarely, so I'm willing to have some pain to get the setup right and then leave it alone. But it was frustrating. If Apple Support is reading these, please request additional errata or release a technote on WDS setup. For example, the manual does not make clear that the devices need to have the same network name, not just entered MAC addresses. And suggesting setup without any security first was a fantastic troubleshooting suggestion.