[Brian]

From what we're seeing with the folks that are reporting this, there isn't actually a problem with their data - the error message that folks are getting is popping up in error for some reason that we're still trying to determine.

The "local or server" dialog pops up when folks switch from one type of syncing to another type of syncing, and then switch back to the first type. This is confusing, but it's arguably correct behavior.

Here's what happens: you're syncing with MobileMe. Your database is synced up to a couple different devices and your server is all happy.

You switch to another type of syncing - bonjour for example. You do a sync.
That copy of OmniFocus sees that there are no other devices syncing with the new server, so it says to itself "Hey, why am I keeping all these transaction files? I can compact my data and save a bunch of space." Your database compacts.

The confusing part happens when you switch back to the original sync method; your compacted database from this machine no longer looks like it's connected to the sync database that's on your server. OmniFocus isn't sure what to do, so it asks the user for help.

If folks do see the "local or server" dialog, whpalmer4's advice is correct - if you pick "local", you'll copy the data on this device up to the other one, replacing the data that it has. If you pick "server", you'll copy the data from the other machine down to the one that's displaying the error message. But folks need to pick carefully, because if they make the wrong choice, then yes, you will appear to have lost some information, though it's important to remember that you can use the "Revert To Database Backup" feature to get back to how you were before this all started.

Apologies to the folks hitting this - it's confusing and I'll mention it to the appropriate folks that can try to make it less so.