My 2 Cents,
Straight to the point, Terms and Conditions state clearly that any Sexual related information is not permitted on Xbox Live, period.
That is how they were at the time of the incident, it's stated in black and white, or green and white if you're signing up on an original Xbox.
Political correctness is no excuse for blatantly ignoring the rules.
I haven't and will not write "I am straight, engaged and soon to be married to the most gorgeous person on the planet, planning to start a family" in my profile despite it being the truth from my point of view, why? Because quite frankly, no one wants to hear it on Live as it is purely a gaming and video sharing system, if someone does, there's facebook for that and I'll gladly give you the link upon request if you give a damn.
It would also breach the terms and conditions of Xbox Live.
This argument is utterly pointless, for there is no right answer, just a number of solutions with problems in each. I say that they should not let her state it as it does breach the contract that you had to tick the box of when signing xbox live membership, had the common man/woman bothered to read it and take it in, they would know. Richard Gaywood should also know the common knowledge that unless it is hidden from plane site, you use an alias online as it's very risky to have your real name in your live account name, but I'd suggest you maybe get a better name, it doesn't take long to get your actual name changed via a form from the government, it would take what, 2-3 days, just think of all the workplace and online bullying you could prevent. Common Sense just isn't that common it would seem.
Ragnaught