Do you get the same results via another protocol? What about using your browser?
The upgrade procedure would be current -> 2.1 -> 3.1 yes. This is done via the web interface.
I use mine just for backup purposes as well, but had to install 3.1 obviously. If not, I probably would have ended with 2.3, because it does have a few advantages over 2.0. If you take a look at the release notes for the CS407e, you'll see things like:
- Enhanced Storage Management (RAID 5+Spare or JBOD)
- Enhanced Backup (backup your NAS)
- Enhanced System Reliability (bad sector remapping, dynamic bad sector recovery and improved HDD driver quality)
- NTFS External HDD Support
- Auto Block and Firewall (mine is connected to the internet)
- New Volume Manager (hybrid RAID)
DSM 3.1 has other new features which you may like (another new Storage Manager, increased NFS speed, ...), but nothing really that I would have used. The choice is yours though. Once you're upgrading, you might as well go the whole way.