I have two files that have been developed by different users. Both contain data that is similar (First Name, Last Name, Address, etc). I am ready to update one file with the other, so that I only have one file in the DB.

My problem comes with the update option. If I am updating file #1 from file #2, and file #2 has an empty field where file #1 does not, it overwrites the field with a blank. I must be doing something wrong.

Is there a way to keep the field data in file #1 if file #2 has a corresponding empty field?

yes, but not with importing. You'd be better off making a relationship between the two files and use a looping script to use your own logic in what field that is transferred and what not, under what circumstances...