Hi Th3 Omega,

The bottom knob controls the tone for the middle pickup and the knob above that controls the tone for the neck pickup (the one closests to the neck). They effect both bass and treble, if you have it on 1 that's the bassiest. If you have it on 10 that's got the most treble. The bridge pickup has no tone control and is the brightest sounding pickup (the most treble).
One of my favorite settings is in between the middle and bridge pickup, it gets a real chimey tone..I like to call it a watery tone. Clapton likes this one and I believe David Gilmour (Pink Floyd) does too.
Another cool setting is between the other two pickups, the middle and the neck. Stevie Ray Vaughn used this one alot and it's a cool bluesy sound.