scott, it's coating magnesium with ceramic. you're right, you can't have a pure magnesium frame. it has to be covered by something to protect the reactive core. that's why magwheels are coated. imagine the fun if they weren't coated: driving in the rain would be a disaster.
for oakley, the highly reactive magnesium frame bits are essentially anodized using a micro-arc method that doesn't have the pores that traditional anodizing methods.
here's the brief of the patent on the technology:
A process and apparatus for forming oxide coatings on bodies of aluminum and aluminum alloys are described. The process includes forming an electrolyte bath in an inert container. At least two reactive metal bodies are suspended in the bath. The bodies are connected to electrodes which, in turn, are connected to a multiphase AC circuit. A multiphase power (preferably three-phase between three bodies) potential is imposed between each of the bodies. The bodies are moved in the electrolyte bath relative to each other until micro-arcs occur on the surfaces of the bodies, whereby to commence oxidation of the bodies. The imposition of the potential between each of the bodies is continued until the desired thickness of oxide is formed on the bodies.