The original post simply asked for a way to directly transfer files between two hard drives that are basically on the same controller. Then things start getting weird: command lines and Telnet, incremental backups and RAID. Why is this so difficult? When I moves files between my computer's hard drives, they're not send out to someplace on my LAN first, then back. So why doesn't the DNS-323 treat its 'local' drives the same way? Why isn't Samba set up to minimize network usage instead of maximizing it?
[End of Rant]
There is a very simple explanation for why it works that way - it's only doing what you told it to.
When you move files between your computer's hard drives, you're doing so from the computer's "console" - the screen, keyboard and mouse are directly attached to the same computer (or controller) as the disk drives.
The DNS-323 does in fact treat it's hard drives in exactly the same fashion, and if you were moving the files using a keyboard directly attached to it, it would transfer the data from the first drive to the second without sending it across the LAN. In case you aren't aware, there is a serial interface on the board in the DNS-323 and if you so choose you can connect a terminal to it using a suitable adapter and move the data. Telnet is simply a way to run a terminal session across the network without having to crack the unit open.
Let's go back to your PC (PC1) - if you had two drives in it and shared those drives out, and then connected to them from a second PC (PC2) and
using the second PC moved files from one volume to the other, the data would flow from PC1 across the network to PC2 and then back again to PC1 - exactly like what happens now with the DNS-323.
You're telling the computer (PC2) to go and get the file from that network share on that other computer across the network (PC1 or the DNS-323) and put it on that other network share on that other computer accross the network (again PC1 or the DNS-323) - your computer lacks the intelligence to know that both network shares are actually on the same computer, so it obediently goes and fetches the file and then sends it back -
because that's what you said you wanted done.
Get the idea now? That's how Network Attached Storage works - be it Windows or SAMBA.