For some reason I'm reminded of this Salon article from a while back.
Apologies if is way off-topic. It has nothing to do with Second Life, but does talk about hysteria related to innocent photography of children.

http://archive.salon.com/mwt/feature/2000/01/31/kincaid/index.html
http://www.salon.com/mwt/feature/2006/07/18/photos/index.html

No pictures of kids next to beds? Sounds alot like the asinine photo development policy.

Back on topic...
I wonder what has been said behind-the-scenes to make LL so paranoid. Whatever it is, its definitely coming through in the form of irrational behavior.
We know that the laws related to this stuff are way out of proportion (refer to the "Every photo must pass this test" concept in the Salon article above). For that part, I don't blame LL one bit. They aren't prepared to go to the Supreme Court and fix this any more than I am. And my small service fees are not enough for me to justify demanding a better legal defense from them in the face of an executive branch that breaks laws to remove judges seem as too liberal and replace them with conservatives over the last 7 years. Perhaps that fully explains their paranoia.