OK, image and explanation: https://dl.dropboxusercontent.com/u/32263228/dos/createpkg.png

"Destination package path" is the location of the created .pak file.
"Game data path (Package root path)" is the path of your modded Data directory.
This path *must* be specified, because the created .pak files contain relative references; eg. if you add "D:\Dev\DOS\UnpackedData\Public\Main\Stats\Generated\Data\SkillData.txt" to a .pak file, the packager has no way to know what file name it should write into the .pak file. Should it be SkillData.txt? or Data\SkillData.txt? or perhaps Generated\Data\SkillData.txt? The root path helps it determine this relative path. If the root path is incorrectly specified, the game won't override the original files at all.

"Source Paths" are directories that you want to add to the package.
Let's say that your modded Data directory is at D:\Dev\DOS\UnpackedData, and you've changed the Cleric and Wizard templates at Mods\Main\CharacterCreation\ClassPresets\Cleric.lsx and Mods\Main\CharacterCreation\ClassPresets\Wizard.lsx.
In this case you can either:
- add the D:\Dev\DOS\UnpackedData\Mods\Main\CharacterCreation\ClassPresets directory
- or add the D:\Dev\DOS\UnpackedData\Mods\Main\CharacterCreation\ClassPresets\Cleric.lsx and D:\Dev\DOS\UnpackedData\Mods\Main\CharacterCreation\ClassPresets\Wizard.lsx files separately.