Note that if all four disk lights come on red this may not indicate an error. It could just be that you are getting low on free disk space (they come on when there is less than 10% free). In such a situation the web interface will show a "RAID Array 1 has low disk space" message.
Ideally you should only do a firmware upgrade on a system that does not already have problems. While as a general rule firmware upgrades are relatively safe as far as your data is concerned, doing a firmware upgrade on a system that already has problems can result in data loss. This is particularily the case if you might have a damaged disk as the system might think it is an empty disk and try and re-partition/reformat it.
At this point I would avoid doing anything further at the Linux level and go through the UFS Explorer route to try and recover your data as described in this
wiki article. While working at the Linux level is fine if you understand Linux, if you do not you are just as likely to do more damage to your data partition if it is still intact. It sounds a bit ominous as /mnt/array1 is showing only the spool folder, so the data may already be lost.
When you have recovered whatever data you can, the best way to get the TeraStation back to a working state is to remove all existing partitions on the disks (effectively returning the system to a virgin state) and then reflash. If a disk IS damaged it could be replaced at this time, and you can check for that by seeing if it is OK under Windows. You would probably need to reflash twice - the first to recreate and format the partitions needed, and the second to re-populate the system partition.