Both your routers are performing Network Address Translation on traffic going from their LAN interfaces to their WAN interface. If you disable NAT on the second router, your problem will most likely be solved. If the option is not included in the manufacturer's firmware, you might want to check if your devices are compatible with DD-WRT.
Here's what happens when a Device 2 connected behind Router 2 pings a Device 1 behind Router 1:
- Device 2 issues an ICMP echo request to the destination of Device 1. Since it doesn't know any specific route to 192.168.1.0/24, it sends it to its default gateway: router 2.
- Router 2 receives the packet from Device 2. It performs Network Address Translation (Port Translation), so that the packet sent to Device 1 seems to come from the router itself, on a randomly selected port. For instance, the packet will seem to come from Router 2, port 12345.
- Device 1 will receive the packet from Router 2 and see that the source IP is Router 2's, and the source port is 12345. It will then answer the request.
- Router 2 receives the answer and knows that everything going on port 12345 should be sent to Device 2 since it has an entry in its translation table.
EDIT: If you simply want to extend a network, you might want to consider giving Router 2 a static IP address in the same subnet as Router 1 (for instance: 192.168.1.253), and connecting a LAN port on Router 2 to a LAN port on Router 1. You would simply not use the WAN port on Router 2.