Ok everything worked successfully and I am back up and running 100%. The following are the steps I took to upgrade from my Western Digital WD1001FALS 1 TB drives configured as Raid 1 to newer WD2002FAEX 2 TB drives (and keep the Raid 1).
#1. Power Down and remove all original drives from the DNS323
#2. Place the new 2 TB drives in the dns323 and power up the NAS.
#3. Enter the web interface for the NAS and select RAID 1 when it prompts you to format the drives
#4. When the format is complete power down the NAS and remove the new drives.
#5. Using and computer with two available SATA ports, connect one original drive (one of the 1TB drive drives containing original data) and one of the newly formatted new drives and boot up the computer uisng a Linux Live CD (I used UBuntu 10.10 64 bit Installer CD selecting try using Ubuntu option)
#6. Open GParted (Under Administration->GParted) and write down the device information of both newly connected drives (the old 1 TB and the new 2 TB), for example in my case the old 1 TB drive had partitions on sda2 and the new 2 TB drive was sdb2 (the largest partition on both represents the partition containing the actual data) and write down the partition format (example ext2)
#7. Open a terminal (Applications->Terminal) and type the following commands to mount both drives:
sudo mkdir /media/dlinkt1
sudo mount -t ext2 /dev/sda2 /media/dlinkt1
sudo mkdir /media/dlinkt2
sudo mount -t ext2 /dev/sdb2 /media/dlinkt2
Now both the old and drive are accessible in the 'Places' Menu in UBuntu and also by looking in /media/dlink1 (old original data) and /media/dlinkt2 the new empty drive that we will copy to.
#8. Issue the following command to copy data from the old to the new drive:
cp -pnr /media/dlinkt1 /media/dlinkt2
#9. When the copy is finished power down the computer, disconnect both drives.
#10. Connect the 2nd 2 TB drive that was also newly formatted in step #3 to the same computer used in step #5 and boot up using the same Live Linux CD and select try using Ubutnu, open GPArted again and delete all of the partitions on this drive and then save the blanked out partition table and shutdown and remove the drive.
#11. Place both 2 TB drives in the DNS323 NAS and power it up.
#12. Enter the web interface of the NAS and select Next when it asks you to reformat the empty 2nd 2 TB drive. When the format is complete, if you see the status of degraded in the status screen, goto the RAID config screen and select Manual Rebuild and when that is complete you are finished.