The iPodhash developers were not trying to circumvent Apple's FairPlay DRM per se -- they were not trying to decrypt FairPlay-packaged content.  Instead, they had been trying to reverse engineer a cryptographic hash value that Apple uses to verify that iPods are talking to iTunes software on Macs or PCs instead of other software. In other words, the iPodhashers were trying to break the ties between iTunes and iPods -- ties that Apple has been strengthening lately since previous versions of the hash were successfully hacked.

A hash value is a mathematical function; it works like a shorthand for data.  A hash function takes a large amount of data as input and outputs a small amount of data (say 256 bytes).  This small bit of data, the hash value, has some very interesting properties: different data inputs are extremely likely to lead to different hash values; even the smallest change in the input data will produce a different hash value; and it should be very difficult to reconstruct the data inputs if only the hash value is known.  A cryptographic hash is simply a hash function that uses techniques related to cryptography that make it more difficult to reconstruct the original data.

For example, imagine a hash function applied to text.  Let's say that a hash value for a mystery novel is "ABCDEFG0123456789".  It's impossible to reconstruct the entire 300-page novel from this value.  Then let's say someone changes the ending of the novel from "The butler did it" to "The cook did it," and re-calculates the hash.  The resulting hash value would be something completely different, even though only one word was changed.

Hash values are not DRM per se, but they are used in related applications.  For example: Microsoft has a technology called Product Activation that it uses to protect its software products, such as Windows and Office, from piracy.  In Product Activation, Microsoft computes a hash value that stands for the user's PC hardware, using values corresponding to the PC's RAM, hard drive, I/O devices, and so on.  Microsoft stores this value and associates it with a piece of software that the user has activated.  It's not possible to reconstruct the actual PC configuration with any certainty, thereby protecting users' privacy.

In this case, Apple is using a hash scheme to tie iPods to iTunes installations, not to protect content.  The latest hash value apparently uses more sophisticated cryptographic hash techniques to make reverse engineering more difficult. 

The primary purpose of Apple's hashing scheme is to make sure that iPod users use iTunes instead of other PC/Mac software.  Calling the reverse engineering of the iPod hash a violation of DMCA is therefore a bit of a stretch, to put it mildly.  In other words, this is another example of how DMCA is being abused in order to protect the interests of device makers -- just as it was in the Skylink case involving garage door openers. 

Of course, it's possible that Apple's attorneys are well aware of DMCA's dubious applicability to iPodhash and simply figured that an ominously-worded nastygram would be sufficient to put the iPodhashers out of business.  The tactic seems to have worked.  It also worked as yet more evidence of how content owners are not the only ones trying to use DRM-related technologies to their advantage; consumer electronics makers do it too.