The micro sequencer sends out voltages based on the position of each of the 4 "step" knobs. Connect it to an oscillator and it will step through the "sequence" consecutively to make a melody (the LEDs tell you which step is active).
The microphone Bit takes sound from its environemnt, and translates it into the electronic language of littleBits. Make sure the switch is set to "sound" when you're using it with the speaker, and "other" for all your other Bits, like LEDs and motors. The microphone Bit also has a 3.5 mm input jack so you can plug in your computer or mp3 player.