Stonefield Query doesn't need anything from the directory where the application that maintains the data (the target application) resides, but a script you create might. The example for the IsValidUser script needs to know where the target application is so it can open a table of users in that directory. Your script may be able to find the target application's directory in a variety of ways, such as reading from a Registry setting or using a hard-coded directory name. However, if you want Stonefield Query to ask the user where the target application is located, set the Need Target Application Directory property to True.
When this property is True, the first time the user runs Stonefield Query, it prompts them to specify the location of the target application (the name of the application displayed comes from the Target Application's Name configuration setting). If you want a default value for this location (for example, if your application is normally installed in C:\Program Files\MyApplication, you might want that to be the default), return the value from the Application.GetDefaultTargetAppDir script. If you want to ensure that the user selected the correct directory, create some code for the Application.ValidateTargetAppDir script, such as checking for the existence of the main executable file for the application.