RSD stands for Remote Software Download, but it's used to refer to the interface Motorola uses to flash the devices and any software that implements such interface (usually software only available for internal use by Motorola). RSD software includes RSD-NetConnected (see installation guide and user guide), RSD Lite (see below), Motorola Software Updater (MSU, available for costumer use) and RSD-NPI (no further information available about it).
What's RSD Lite
RSD Lite is a firmware-flashing application by Motorola. RSD is able to flash two kinds of firmware formats:
- SBF Files - SHX Files (for an older format called HS, unrelated to the Milestone)
RSD Lite vs. RSD-NetConnected
It seems one of the main differences between RSD Lite and RSD-NetConnected is that the latter has DBS support, which means it is able to cryptographically sign data blocks on the phone when the correct credentials are available (but it's only middleware, since the particular DBS code to be written to the phone is fetched from the DBS server at Motorola). RSD Lite, on the contrary, only seems to be able to flash firmwares. Another difference is that RSD-NetConnected is able to automatically unlock Subsidy Locked phones, but only if a hardware dongle is connected to the PC and the correct credentials are entered. On the other hand, RSD Lite isn't able to unlock Subsidy Locked phones (it will silently fail to write over protected areas).
RSD Lite 4.5.3 -> 
RSD Lite 4.5.7 -> 
RSD Lite 4.6.0 -> 
RSD Lite seems to be able to connect and flash from within booted Android. I just put Device into Motorola Phone Tools Mode and it shows:
IMEI: (removed) Technology: UMTS Software Version: S_U2_01.03.13GSMEPU91A_U_91.08.0DP Flex Version: USASHLSO2DEB1B803D.0R Bootloader Version: 9072 DRM Version: N / A
With Start being available...
User [mbm] has created a Linux program that might be able to flash SBF files into the Milestone. It has been tested successfully with the Droid and Milestone. Check it out here.