Update: 03/16 6:50 PM EDT by J : The problems started with the AP story (cited above). The decryption software posted by the activists was described as "a method for kids to deduce their parents' password and access [pornographic] Web sites."
This was the spin that Mattel's PR people put on the story. They surely didn't want the news media reporting that activists had posted software that exposes their secret, hidden blacklist to the light of day. That wouldn't sound so good - it might get people to ask "why are these blacklists encrypted at all?"
Instead, Mattel's PR decided to say that the decryption software allows kids to view pornography. Predictable - this is the same smear that's always dragged out - but the media swallowed it uncritically. (The AP story was repeated on cnet, and everywhere else that uses the AP feed.)
Even the normally-critical Declan McCullagh wrote a story for Wired whose opening sentence was corporate propaganda. "Toy-maker Mattel has sued two programmers who revealed how to circumvent its CyberPatrol blocking software." Thankfully, the rest of his article gave the full story.
Mattel is not upset about CPHack's minor feature of circumventing the program when installed. Peacefire has been distributing their own instructions to disable Cyber Patrol for months now, and hasn't been sued. (They're pretty simple instructions, too.)
Mattel is upset that people can see the flaws in their software which were previously hidden by encryption. They want to continue selling bad software and will use the full force of law to prevent you from learning how bad it is. Legal papers have already been served and the proceedings will presumably begin shortly. Stay tuned - and don't trust press releases.