Attributes are used to define different variation of a same product.
A ipod can have many colors: Black, White, Red, .....
It also comes with various Size: 16G, 32G, 64G
For the above example, you will have 2 attributes: Color and Size
Go to Sales -> Configuration -> Product Catogories and Attributes -> Attributes
To create a attributes, you will only need to enter a new Name for it.
Once a attribute is created, you can proceed to Attribute Values to add the different values to it.