Digital signals can represent information and are used to transfer data and control systems. They take on discrete voltage levels representing 1s and 0s. Microcontrollers like the Arduino use ports and pins that can be configured as inputs or outputs to send and receive these digital signals. Inputs like switches can be read to control outputs like LEDs. Interrupts allow the microcontroller to respond to external events without constantly checking. Serial communication allows the Arduino to transfer data to other devices like a computer by encoding data as a stream of 1s and 0s sent through transmit and receive pins.