Many thanks for your detailed description of the problem, and after following what you are doing, I was able to reproduce it fairly quickly.
What is happening here is that you are attempting to add a source database without first creating a database project.
The purpose of a database project is to specify a base directory for DBSourceTools to script files to, and also to store the Source | Target database tree structure (.dbsp files)
To create a database project, click on File | New | Project. This will bring up the New Project screen, where you specify the project name and base directory. From this new project screen, you can then go on to select a database.
If you do not have a database project, and click on Database | Add | New Source Database, you will get the error that you are experiencing.
I'll make some changes to the code base to prevent this from happening in the future.
Many thanks for your input. Please let me know if this helps.