The filter has the most effect on the sound’s character or "timbre." It affects the timbre by changing the relative volume of certain frequencies in the sound. Use it with other synth Bits to give the impression that a sound is "brighter" (more high frequencies) or "darker" (more low frequencies.)
The "cutoff" knob sets the frequency to be emphasized, and the other controls 'peak,' or intensity of the filter. If the peak is turned up all the way, the filter turns into an oscillator! This is great for shaping all of the sounds you can make with the Synth Kit, but it's especially good with a noise input.