I believe it is simply where you want your files to be located on your hard drive. I think of it as a file path. Someone please correct me if I am wrong...
i have the manual, but for me it seemed somewhat difficult to follow. I had a small hiccup when I saved p2 contents inside the database folder, but once I moved them out everything was fine. I've just never heard the term database used in this way, and don't quite understand what it does.