Yes, pseudo-random permutation.

The basic algorithm goes like this. To generate the codes

    generate_codes(range valid_range)

      for(i in valid_range)
        encoded = RSA.Encode(key, i)
        code = base32.Encode(encoded)
        print code

and then, to verify a code

    verify(string code, range valid_range)

      encoded = base32.Decode(code)
      value = RSA.Decode(key, encoded)

      return valid_range.contains(value)

where of course RSA is an implementation of http://en.wikipedia.org/wiki/RSA_(cryptosystem) and base32 refers to http://en.wikipedia.org/wiki/Base32.

On top of that, we needed codes to be of a specified maximum length and with a specified alphabet. Thus, instead of base32 we used a different base with different letters, but the same algorithm. To fix the length of the codes, we needed the output of RSA encode to be less than a specific value. In RSA this can be controlled by choosing the modulus part of the key.

There are more subtleties to this, but the gist is there.