Use Output -> Device when you want to burn to a blank disc. Write files/folders to disc is a shortcut to this Output mode.
Use Output -> Image File when you want to save it as an ISO image file, e.g. for testing on a virtual machine. Create image file from files/folders is a shortcut to this Output mode.
Extract Boot Image is a feature that allows you to extract the bootable bit from a bootable disc, e.g. from a vista / win7 installation disc. If you want to extract the bootable bit from an ISO image you'll need to mount it to a virtual drive like Virtual CloneDrive, Daemon Tools, etc.