No, that makes sense (and it's what I ended up doing); I was just confused because you mention the local/server prompt on the second device, but not the first, so I thought it wasn't supposed to appear.
Local/server is a tough distinction, since you're using the iDisk, which appears as a local device AND a remote device! But I think the current dialog is as clear as it could be, given that. I was forgetting that the iDisk copy is not the local database itself, too.
One possibility would be to give me more information about the two files; was one created earlier, or does one have a more recent last-entry, or something like that? In other words, show me one of the differences between the files, so that I will know which copy is the one I care about. That's easier on the Mac than the iPhone, where you have so little real estate; maybe a third "explain further" or "show details" button there?