The malleus (hammer), incus (anvil) and stapes (stirrup) are the smallest bones of the human body and are located in the human ear. They are called the auditory ossicles. There are sections of the human ear: the outer ear, the middle ear and the inner ear. The middle ear is the location of the auditory ossicles. The inner ear is fluid filled and the location of the organs that transmit hearing and balance to the brain.

When a sound wave hits the eardrum (tympanic membrane), the movement of the membrane causes a movement of the attached malleus. The malleus transmits the vibrations to the incus, and incus transmits vibrations to the stapes. When the stapes moves, it creates a vibration of the fenestra ovalis (the opening to the inner ear). The inner is fluid filled and vibrations of that fluid stimulate the receptors of the auditory nerve. The auditory nerve transforms the vibrations into perceived information which the nerve then transmits to the brain.

More Info: en.wikipedia.org