You are on the right "path". You just need to include the full path
of the file  like "C:\dir1\file.xls" when you open it. Something like
this is useful if the files are in the same directory as the macro's
workbook:

p = Application.ThisWorkbook.Path
Workbooks.OpenText Filename:=p & "\" & file1 & ".xls"

You may want to use the FileDialog Object. Search excel help  or
yahoo for more info.

After that, change the following:
Workbooks(file1).Activate
Workbooks(file1 & ".xls").Activate