apparently I really need to beef up the intro section...
When GTKRadiant opens up, select UFO:AI in the game selection before hitting OK. IF YOU DON'T get this box, you're in Q3Radiant, and need to upload the GtkRadiant version. (This is for anyone else reading this, you've got the right one, TerminatorII).
Next, In Edit Menu -> Preferences. As you mentioned there's an engine path in the 'Paths' item on the left. You're looking for the path that leads to the ufo.exe file. It should also have the folders base, build, src, and tools in it. For my system, this is C:\Program Files\UFOAI21
And the only stupid question is the one unasked.