In case you want to get the ksh script running, I'll comment on that. In your first try you were moving toward a solution where you repeatedly scanned a file. Don't do that. You want to read each file once. I think something like this will work:

Code:

i=0
exec < file1
while read array[i] ; do
      ((i=i+1))
done
exec <file2
while read entry ; do
      i=0
      found=0
      while ((i<${#array[@]})) ; do
            if [[ $entry = ${array[i]} ]] ; then
                 found=1
                 break
                 ((i=i+1))
            fi
      done
      if ((found)) ; then
            echo $entry is in file1
      else
            echo $entry is not in file1
      fi
done

You might get away with something like:
set -A array $(cat file1)
but the resulting set statement must be less than the max line length. It might work at first, then fail later. The loop seems a bit safer. And it fires up a cat process. So the loop will be a bit faster too.