Ok - a new day - I'm less fatigued, less frustrated - I put my spare disk in a Windows system to delete the partitions for another "go-round" and notice that I have three partitions -2 x ~500MB, 1 x 7 GB and ~230 GB of empty space - this is definitely not correct.
Check the DNS-323 and the status page size I have a 7GB RAID1 volume with a pair of 250GB disks - what did it do with the rest of my space?

?
I have seen this before with earlier firmwares - so I reformat, first as separate volumes and then as RAID1 and the problem is resolved - at least for now.
I "fail" a disk, install a clean replacement, and once again - it automatically rebuilds - even though "Auto-Rebuild" is disabled.
Here is what happens - you replace a failed drive, you power up the unit and login and you are propmted to format the drive (only if the drive is large enough - if it's too small you'll get a message telling you that), on completion of the format, you'll get a prompt to restart the unit and on the restart, when you login, you'll be taken to the TOOLS/RAID page which will tell you that the RAID volume is synchronizing.
The reason why I didn't see this the last time around is that with the 7GB RAID volume, it only took a few minutes to synchronize.
Based on the experience documented in this thread - I draw the following conclusions ....
1) the wording of the messages is misleading - the DNS_323 will automatically resynch the array,
without prompting regardless of the setting chosen for "AutoRebuild" - you CANNOT disable "AutoRebuild", presumably you can trigger a manual rebuild.
2) D-Link's partition & format script logic is still seriously flawed, and the new feature doesn't fix anything - it simply provides a way to trigger a manual resync, and confuses the end user with the misleading messages.
Come on D-Link - I'm sure there's enough space in flash memory to include a "manual partition page" for advanced users - show the disks be make, model, serial number and capacity, and let the user choose which one to format, let the user select the partition size.
Add a telnet server - to let the user directly manipulate the process.
Add a disk utility that runs on the PC and controls the partition/format process - it can't be that difficult to do.