More or less everything in the show is built out of letters, and generally reflects the letters that its word is composed of. So if you have a fence, for example, the slats will generally spell out the word "fence". The main characters are all composed of letters, too - so if you look at Dog from the side, you can actually see the word "dog". And if the Word Friends need a particular item, it's just a matter of finding the right letters and putting them together in the proper order. As soon as the word is spelled, it becomes that item. (The Word Friends generally keep little stores of letters in their homes, in much the same way that we keep tools and equipment. Sometimes, however, Dog will dig up a letter or two, which seems to indicate that the letters occur naturally as well.)
Now, this is a great show. It's been a huge help in teaching Firstborn about spelling and reading. It's also, for me, an intriguing example of "magical thinking" - the idea that the Name is the reality, and by changing the name you can alter the reality. (This actually happens in the show; there's an episode where Ant gets tired of being so small, so the other Word Friends slap a G and an I on his butt and turn him into a giant.)
I can't help but wonder, though... late at night, after the show is over, do the Word Friends get together over a couple of beers and argue about whether life in Word World came about by accident, or whether there was an eternal First Word that assembled all the others? I can sort of picture Sheep arguing that probably the right letters just happened to fall together in the proper order, while Bear insists that they must have been assembled. Frog probably sides with Sheep, and points out that there are plenty of loose letters around, and given enough time they could certainly fall into the right pattern randomly. Pig, on the other hand, feels that odds of that are too unlikely, and anyway nobody's ever seen a word spontaneously assemble itself. Pretty soon the lines are drawn, and Pig and Bear are looking around for the letters to spell "stake" and "pyre" while Dog tries to calm everybody down. (In my mind's eye, Duck is passed out amidst a pile of empty shot glasses, cheerfully oblivious to the whole issue.)
This, by the way, is why I should never be allowed to watch children's programming.