Howdy NJRanch And All:
The above posts have you pretty well covered but let me add-. The inside nipple is for the vacuum retard function of this distributor/carb combo along with some emmissions stuff from that period. You will be best off with this distributor by hooking the outside nipple to a ported vacuum source on the OEM '68 Autolite 1100 (with NO SCV). Do not cap off the inside/retard nipple. The two sides vacuum canister are supposed to be able to move together. If you cap off the inside you will be creating a vacuum lock which will impede and/or limit the movement of the outer side.
The vacuum retard tube went to a distribution block near the front of the intake log. It can/should be removed or capped off unless all of the original smog stuff is present and functioning as designed. Ironically, much of it did not work as designed when new. This system should only be maintained where law requires or restoration is the priority.
FYI the Autolite 1100 from 1968 is downsized in CFM, from 185 up until 1967 and then down to 150 in '68 & '69. California only 200s went to this system in '66 & '67. So while you gained from a distributor with true vacuum and centrifugal advance systems you are losing power due to carb downsizing.
Adios, David