From livemint.com:

Games and sex rose to mainstream prominence last year when a bunch of intrepid hackers found hidden sexual content in popular title Grand Theft Auto: San Andreas , causing a storm of controversy and outrage from legislators—including then US senator Hillary Clinton—and parent groups.
But now, a new movement, driven by smaller independent studios and digital distribution, is attempting to take a broader, more inclusive view of sexuality. So while the Nintendo DS handhelds of the world are flooded with cheap, home-brewed strip poker apps, these nouveau games are exploring gameplay opportunities that move beyond cheap antics and pornography.

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From gamezine.co.uk:

One helpful brother explains how he was showing his sister how to play an online Xbox Live game by creating an open UNO game. His Xbox Live Vision camera was turned on – showing him, his sister, and his three-year-old daughter sitting on his lap.

What happens next is unbelievable. A fellow player with camera capability joins the game. The player goes about playing porn on his PC, then points his camera at the pornographic images and leaves it there for all other UNO players to see. The father/brother expresses his disgust on gaming forum NeoGAF;

"Really now. Is that necessary? My daughter is plainly sitting there on my lap and yet he puts the porn on anyway?

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From sfgate.com:

“A state lawyer tried Wednesday to revive California’s ban on selling violent video games to minors by arguing, to an apparently skeptical federal appeals court, that mayhem should be judged by the same obscenity standards as explicit sex.

Games in which players score points by killing, maiming, raping or dismembering human figures are “intrinsically harmful to the kids that play them,” Deputy Attorney General Zackery Morazzini told the Ninth U.S. Circuit Court of Appeals at a hearing here. Young game players develop aggressive thoughts and become desensitized to violence, he said.

Just as the sale of explicit pornography to minors is banned, the state should be allowed to establish an adults-only category of ultra-violent video games, as a 2005 law would have done, Morazzini said.”

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From whattheyplay.com:

"Parents are more concerned about their children’s exposure to video games than alcohol, violence and pornography, according to recent polls conducted by What They Play (www.whattheyplay.com), the parents guide to video games. Nearly 3,000 respondents in two separate What They Play polls concluded that drinking beer and watching pornography were less objectionable activities for children than playing certain video games. Further, viewing violence was more acceptable than seeing content involving sex and sexuality within games."

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