In Knytt Stories, how do you make the words appear in the speech bubbles above characters when you go near them?

Use sign a,b or c from bank 0 and then go to world properties (and perhaps screen properties, I'm not quite sure) and type what you want it to say in the corresponding box. If you want it to say it on more than one square then use 1 sign and as many sign areas as you need so that you can read it where you want. If you are still in doubt try opening up the tutorial and see what nifflas has done.

Now I'm having a little trouble adding a custom music piece as an ambiance...

Oh I think it needs to be a particular type of file and then you go to the custom data screen to enter it. If you need more help you should go to the Nifflas support forum. There was some program I got there that could change the music file format.

Did the signs work?

Signs work, thanks.