What is it doing or not doing?
You posted a VI with no initial data saved in any arrays or controls as default. We need something to play with and something that tells what the output should look like.
You are using Insert into array, but from your original description, it sounded like you wanted to replace array elements.
Your use of local variables scares me as well. You may have a race condition.
Also, it seems to me like the heart of your code (the For Loop) isn't doing much. Most of the work done in earlier iterations is getting lost. You are starting with "Array 2" and doing something with "output array" on every iteration, but you never update Array 2, and anything that happens to "output array" gets lost once the next iteration starts.
It seems to me that something like your output array should be what is stored in the shift register since that seems like what you want to continually update on every iteration of the For loop.
