They've screen scraped the Smithsonian picture library and uploaded the images to Flickr. They've had legal advice that the Smithsonian's prohibitions on reuse were not valid, and state that:
This is not to say that the Smithsonian cannot obtain funds through creative means, only that the Institution should be cognizant of a special and unique status under our laws. One has only to look at the thriving Smithsonian Associates program or the wildly popular Smithsonian Folkways music site to see that there are many options for government entities to creatively raise funds. Privatizing the public domain is not one of those options.