Conversion Options
This section is available only if you have selected the More Options button of the Color Settings dialog box.
Engine
This setting controls the Colour Matching Method (CMM) that is used to convert colours from one profile to another. I recommend leaving this option set to the default value of Adobe (ACE) unless you have a good reason to use a different engine. The other available options are ColorSync for Macintosh users and Microsoft ICM for Windows users. Both of these provide an excellent alternative. However, because I trust Adobe Photo shop for photo editing, I feel perfectly comfortable trusting Adobe's engine for colour management. The consensus among experts seems to be that the Adobe engine is more accurate than the alternatives. It also provides a cross-platform solution, because the other options are not cross-platform.
Intent
This option allows you to specify the default rendering intent used for conversions from one profile to another. The behaviour of the available rendering intents is explained here. My recommendation is to set the Relative Colorimetric rendering intent as the default, and use it unless you have an image with a significant number of colours that fall outside the gamut of your target space. (In that case, the Perceptual rendering intent is the better option.)
Use Black Point Compensation
I feel the Use Black Point Compensation option should always be turned on. It affects the process of converting images from one profile to another and, as the name implies, has an effect on the black point in your image. With this option on, the black in your image will be mapped to the black point of your output device (typically a printer). That means that the full tonal range of the printer will be used, from the darkest black it can produce to the brightest white (defined by the colour of the paper).
With this option turned off, the black point in your image would not be set to black in the output profile. Either the blacks will be lighter than black, producing a muddy image, or they will be darker than black, causing clipping in the shadow areas.
Use Dither
The Use Dither option (only available for 8-bit per channel images) provides a method of simulating colours that are not available in the destination profile during conversion. It will cause available colours in the destination profile to be blended to simulate colours that aren't available. This helps to enable colours that might otherwise be impossible to reproduce, but more importantly helps to avoid banding and posterisation in the image. For images that will be printed, this is almost always a benefit.
For images that are going to be saved with compression, as would be the case when saving an image in JPEG format, the noise can result in a larger file size. If you are particularly concerned about file size with your JPEG files for web display, for example, you might turn this option off while working on those images. In all other situations, I recommend leaving it turned on.
Advanced Controls (More Options)
The Advanced Controls section of the Color Settings dialog box offers a couple of options that most photographers will simply want to leave disabled.
Desaturate Monitor Colours
Many photographers initially assume the option to desaturate the colours on their monitor might be a good thing based on their understanding of the capabilities of printers and monitors. Because they know a printer can't produce the vividly saturated colours they can view on their monitor, they figure that desaturating the monitor will help produce a better match between monitor and printer. That isn't what this option is designed for, and it will likely cause more problems than it solves if you attempt to use it for that purpose. I recommend always leaving this feature turned off.
The only time it may be helpful to turn on the Desaturate Monitor Colours option would be if you are working in a colour space with a very wide colour gamut. In those situations, the colour space will contain colours that are beyond the colour gamut of the monitor. In other words, the monitor can't even display some of the colours available in the colour space. Desaturating all the colours in your image allows you to bring the colours in your image within the gamut of your monitor. That means the colours you see will not be an accurate representation of the images in your image, because the overall gamut is compressed to fit within the gamut of your monitor (if an adequate setting is used). Considerable interpretation is required to make adjustments to the image, because the entire image will be desaturated and not an accurate representation of the actual colours.
Fortunately, most photographers don't need to work in a wide-gamut colour space. The most common output processes offer a colour gamut that is narrower than that of a monitor, or with very few colours out of gamut, so you don't need to worry about being unable to see colours accurately. The bottom line is that unless you are very experienced in this area, this option should be turned off.
Blend RGB Colours Using Gamma
Although photographers use light in some way at every stage of the process of producing their images, they tend to think about the dyes or pigments that produce the final result on paper when they think about the final product. For that reason, when editing an image they tend to think of colours blending with each other as if they were ink on paper. By default, Photoshop blends colours with a result that matches what you would expect when mixing inks.
The Blend RGB Colours Using Gamma option allows you to change this behaviour so that colours blend as if they were light rather than ink. For example, if you have a red background, and you paint blue over the top of it with a soft-edged brush, the edge of the stroke would be a relatively dark blue with the option turned off, and a light pink colour with the option turned on.
Based on the way most photographers tend to think about the blending of colours their images, I recommend leaving this option turned off. Because most photographers don’t spend a significant amount of time painting colour onto their images, this option isn't of key concern anyway.