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The Destination section has 3 settings you can modify: file format, codec and file destination.

File Format: If you want this video to play on your iPod, then select MP4 file for your file format.

Codec: You can choose either AVC/H.264 or MPEG-4 for the codec. An H264 file will take twice as long to encode as a MP4, but be smaller in file size. If speed is not an issue for you, select H264. However, if you select H264, you must also choose the Baseline profile as your encoder in the Video section. Personally, I use MPEG-4. It's fast and looks pretty good.

File Destination: You can name your file and choose its destination using this box. Try to pick a location that has sufficient disk space to store the ripped file. On average, you need about 300 MB per hour of video.