The _blue capacitor_ board is not part of the programmer. That's our project device being programmed, in this case an emulator of the MOS 6581 SID chip used in the Commodore 64 and B128 vintage micro computers.
The fuses are dedicated bits used for configuration of an Atmel AVR family device, on top of whatever programming that you do. So, for example, you use a fuse to set the clock speed, within the range available, for the chip.
You'll want to download the Atmega 8535 datasheet from the microchip website. I've not worked with this particular device, but all of the fusible configuration options will be in there. For the clock look for the section talking about fuse CKOPT.
