I have some other suggestions:
+ I think that the default access after just installing should be ssh instead of telnet, or should have them both by default (ssh and telnet). Off course, this could lead to a question: OpenSSH or Dropbear by default.
If somebody doesn't like to have ssh installed by default, maybe you can remove the ssh from the default via a parameter to make.
+ For upgrade. Well, due to the size of the distro, and the configs (not too much of them), I don't think this can be a terrible problem, but: shouldn't there be a way for having the whole system as jffs2?, and have just one "partition" for the kernel (maybe fixed size, say: 1.4Mb). This way, the whole system could be made of packages, and be easier the upgrades. Well, the drawback could be the great advantage that squashfs gives: compressed files (does jffs2 support such a thing?). I think this could be of less importance on the wrt54gs (due to the extra flash).
Any comments are wellcome,
Sincerelly,
Ildefonso.