The dry method involved a very sharp needle thingy that had "teeth" on it.  You poke it up and down in the material until it starts to look like a bead.

The wet method was much easier.  You just dunk the material in warm, soapy water and roll it between your hands until it looks like a bead.

You can also embellish these beads with seed beads.

More more information on felting, check out Hand Felted Jewelry and Beads by Carol Huber Cypher.