Apparently the "Apple Censors Dictionary" headlines were too toxic to ignore: Phil Schiller himself wrote to Daring Fireball to explain what happened: Basically, it was all a big misunderstanding. Apple wanted Ninjawords to be rated 17+, with the dirty words.
Ninjawords was a victim of unfortunate timing, originally submitting their app in May, before iPhone 3.0's parental controls went into effect, and rather than wait for the controls to arrive at a then-unknown date, they tried to scrub the bad words to hit the store as soon as possible. Which wasn't enough to get in without a rating, and by the time everything was resolved, their scrubbed app was in the store with the 17+ rating suggested by the reviewer. Apple, Schiller says, simply wanted the app to carry a 17+ rating, with the entirety of its Wiktionary-powered language content—clean, dirty, downright disgusting—intact.
It's worth reading the whole letter from Schiller over at Daring Fireball, though the best part might simply be the fact Apple is listening, and they recognize that the App Store approval process has to improve. Of course, whether or not it actually does is another story. [Daring Fireball]