The green bar represents the Bitrate bar, this is the quality of the resulting mp3 file, higher bit rates files are of a higher quality than lower bit rate files. 

Optimum Settings

To quickly set lame to its best - set both Channels and Frequency to [as source] and click Advanced Options, under Presets select one of the Alt presets such as ALT Preset Standard. It is the ALT presets that give the highest quality for file size, there are a variety to choose from to alter the final size and quality. It should be noted, most Alt presets use VBR (see below), your mp3 player (if an older portable) might not like VBR encoded files.

All the Settings

Frequency - number of samples per second to be encoded, [as source] will set the final frequency to the source frequency (44.1KHz for Audio CDs).

Channels 

• Stereo - two channels of sound, enables instruments to appear separated from one another.
• Mono a recording with only a single channel of information. A question that is often asked Why is my 128kbps encoded Mono file, not half the size as a 128kbps encoded Stereo file? The answer is simple, to keep the Kbps rate constant, the mono file is encoded at twice the quality rate as the stereo file (Kbps measurement is for the whole recording regardless of the number of channels, so Per Channel Kbps = Kbps / Number of Channels).
• Joint Stereo - Luckily for compression of Mp3's sound on the left channel is very similar to sound on the right channel, Joint Stereo takes advantage of this similarity to use the savings on the 2nd channel to give higher quality compression.
• [as source] set the channels to that of the source (2 for Audio CDs), if 2 channels then Joint Stereo is used.

Advanced Options

On the Advanced page lurk options to tweak with the innards of your mp3 files, there is:

Encoding - Mp3 files fall into these distinct categories:

Constant Bit Rate (CBR), a constant bit rate is used throughout the encoding process.

Variable Bit Rate (VBR). Mp3 files are made up from 100's of small audio chunks, called frames. Whilst encoding a VBR file, the encoder decides which bit rate to use for each frame. Bit rates can drop down to lower value when it is warranted (if there is not much sound going on), and switch up to a higher bit rate when required. VBR files are great when a compromise between file size, and quality has to be made. VBR Options - a Minimum Bit Rate and a Maximum Bit Rate are specified by clicking the left and right mouse buttons on the green bit scale. Next to 'Variable Bit Rate' is Quality 'Low ---- High' this controls the quality factor for VBR.

Average Bit Rate a little like VBR except with VBR the end file size is not known (could be small, could be big), ABR is VBR with known end file size, it works by regulating how variable the compression is, so at the end of the compressing the average is exactly the value specified.

Preset Quality there exist nice people out there who have done all the work in determining settings for various qualities, be aware though many of these presets over-ride certain other settings, so don't be surprised if you cannot alter say frequency after setting a preset.

Set Bits

Copy write marks the mp3 file as containing copywrite material.
Original marks the mp3 file as an original file (not a copy).
Private - the mp3 is private.

Write CRC Checksums will add a little checksum code to each frame of your Mp3 file, so the decoder can tell if it has become corrupted.

Spoon-