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The error is coming from the superflous /dev/null and the extra punctuation.

The loop would be much more robust with while instead of for:
find "${D1_DIR}/${D1_NAME}" -name "*\.${FILE_DIR}"...

Remove the below part from find command and run
/dev/null {} \;

Oops. Just noticed your closing EOF. Closing EOF should be at the beginning of the line:

#!/bin/ksh
function ftp_files
{
ftp -n ${D2_SRVR} <<EOF
quote user ${D2_UID}
quote pass ${D2_PWD}
...

Use double quotes instead of single quotes. This should work as long as $x does not contain forward slashes. This script will replace every string1 on every line in file123 with the first line of...

No need for the cats and use double quotes or additions single quotes to persuade the shell to substitute your variable:

while read x
do
sed -e 's/string1/'$x'/g' file123
done <...