Normally when a character is talking, AGS simply cycles through the speech animation from start to finish, and then loops back round. However, lip syncing allows you to be cleverer by specifying a particular frame to go with various letters and sounds. Then, as the character talks, AGS plays appropriate frames to simulate the character actually saying those words.
In the Lip Sync Editor, you have 20 text boxes, one for each possible frame of the talking loop. In each box, you can enter all the letters which will cause that frame of the loop to be played. Letter combinations such as 'th' and 'ch' can be used too - AGS will match each part of the spoken text to the longest possible phrase in the lip sync editor.
Seperate the letters by forward slashes. For example,
3 R/S/Th/Gwill mean that frame 3 of the character's talking animation is shown whenever the letter R, S, Th or G is spoken.
The "Default frame for unlisted characters" box allows you to set which frame is used when a character not listed in any of the text boxes is encountered.