What it sounds like is they've been asked to prepare a new OS release that allows an unlimited number of attempts to enter the passphrase via some network link. The press release is written to sound like without a software release, it wouldn't be possible to mount this kind of attack, however attacks like this are generally possible regardless of having some specially modified and signed OS image: for example, by cutting power to the hardware precisely when it is clear a password was incorrect, before the hardware has time to implement any destructive actions. Attacks like this have been used against SIM cards since the 90s.

I'm ambivalent regarding Apple's stance. In principle they are doing the right thing, but in practice, it seems they may be kicking up a whole lot of fuss over a relatively minor issue (with the exception that providing an easy means to brute force a phone to the authorities sets a horrible precedent). As for creating a universal backdoor, it seems highly unlikely they couldn't produce a signed OS / coprocessor firmware image that wasn't locked to one of the various serial numbers associated with this particular device

edit: as mentioned below, this order entirely originates with Apple's use of DRM to prevent software modification. Had users actual control over the devices they own the FBI wouldn't need to request a signed firmware in the first place. Please think twice about what Apple might really be defending here before downvoting