Well for starters, the code will not run on a 18F1320 as is. There are several reasons: No #pragma CONFIG is defined. The 18F1320 only has 256 bytes of RAM so the following variable just won't fit:
char instring1[1024]
As you guessed, there is no native file system on a PIC nor a console. I think, by default, the stdio functions like printf use the UART on the PIC so that would need to be configured also. Never tried it myself.
You'd really have to ask your instructor what the source of input is to be. ie: Are you going to have a keyboard attached to the PIC or receive commands via the UART, etc? Same goes for the data output.