The DefaultDir field defines what the directory will be called on the target media and source media.
The simplest form is simply
This will use a directory called Name on the target and the source.
The next level of complication is with long names
This defines an alternative short name
The next level allows you define seperate names for the target and the source media.
In this case the name (or long short pair) before the colon define the name of the target directory and the name after the colon defines the source directory name.
Finally a special name . (full stop) is defined that means no name use the parent directory.
This is usually used when you have two files with the same name that are installed for different languages or different operating systems. In this case seperate msi directories are created with the same parent but different DefaultDirs eg.
You will have components with conditions for choosing the operating system and using the appropriate directory. The install bulder place the files in 9XFiles and NTFiles respectively but when they are installed they will be placed in the parent directory.
If you want see the source directory structure and you are using cabs do an admin install
msiexec /a YourProject.msi
this will unpack the install to your network or local drive so that you can see the structure.
In the example I gave earlier the files intended for the commonfilesfolder will be placed in a directory called SharedFiles.
Hope this explanation helps you understand. If you want to know more look at the Msi documentation for the Directory Table.
Installer Database Reference