Hiya Sarah,
Looks like the code has the .js and .css files inside a folder called shadowbox so just make a folder in your main website directory and name it that and put the files inside there.
Read through the entire page he posted and I think most of your questions are answered there. Has step by step instructions for what to do with the files and images (including the close image which is considered an image) and where to put them etc.
The File names can be whatever you want them to be so if you're planning to use this for videos, then the images would be the image names and the video links would be the video names. This would open the video when clicking the image on the gallery. Do like shown below but replace the information highlighted with your own.
The href part highlighted below would be your video directory and file name.
The src part highlighted below would be your image name that when clicked takes you to the video.
<a href="shadowbox/
images/forsythia.jpg" rel="shadowbox[plants]"><img src="shadowbox/images/
forsythiatn.jpg" alt="Forsythia" title="Forsythia bush" /></a>
If your video directory resides outside of the shadowbox directory you'll need to add a ../ to the front of the video directory like so:
<a href="../yourvideodirectory/yourvideoname.ext" rel="shadowbox[yourvideocategory]"><img src="shadowbox/images/yourimagethumbnailname.ext" alt="yourvideoinfo" title="yourvideoinfo for caption on zoomed box" /></a>
Hope that helps and I'm sure Rolly will be around soon to further assist you