In my day, a router was a Intel Pentium @90MHz with 4M of RAM. No HDD, only a FDD with Linux. Granted, it probably would have problems today with speeds we're all used to and WLAN, but, man, strip it down, strip it all down to Megs. You don't need X running on that. You don't need all these services. Fonts. Libraries. Default pictures. That's all bloat. Throw out the SDD. A 1G usb thumb drive is enough. I/O speed concerns? You got 8 gigs of ram, dude, you could fit your whole "factory" image in it and have enough space for the second one. Ramdisk the shit out the system. Dude...
And, just out of curiosity, how does using iptables make that not a real firewall (even if you're using iptables in an indirect manner)?