There is a function (Function($_)) that replace all \"1\" with \"2\" for each file in the directory. New content is written to the file out.txt.
Get-Content "C:\Dir\*" will give you the content of everything in C:\Dir in one go, so you won't be able to modify each file individually. You'll also get errors for any directory in C:\Dir.
You need to iterate over each file in the directory and process them individually:
Get-ChildItem 'C:\Dir' -File | ForEach-Object {
$file = $_.FullName
(Get-Content $file) -replace '1','2' | Set-Content $file
}
The parentheses around Get-Content ensure that the file is read and closed again before further processing, otherwise writing to the (still open) file would fail.
Note that the parameter -File is only supported in PowerShell v3 or newer. On older versions you need to replace Get-ChildItem -File with something like this:
Get-ChildItem 'C:\Dir' | Where-Object { -not $_.PSIsContainer } | ...