Target database is the database that will receive all the tables and data from the source database. Full Convert will (by default) recreate all the tables needed and copy all the data over. It will then create indexes and foreign keys (this doesn't not apply to all database types, of course - as some don't have such concepts).
If your desired target database is relational, make sure your database server is installed and running before attempting to connect to it.
Once you select your database engine, screen changes to let you specify connection information needed to connect to the database and read it. Depending on database type, that may mean selecting folder containing database files, or a server name, port, credentials and more.
Once you fill-in connection properties, click Next to continue to Table selection screen.
Detailed information on connecting to databases can be read here: