I never thought of reporting them to MS. I will now though.
Although they don't actually offend me, I just find the amount of penis/nazi/sex emblems to be annoying. I think it's the sheer lack of imagination that annoys me the most.
I completely forgot about the XBL option! I've seen some explicit emblems and reported them all but if XBL works I'll do that. Too bad you can never find out whether someone actually got banned (without having them friends or something), it'd be nice if they had a list or sent an (automated) message to show theat they're active.
How would the xbox pets know what game the offensive emblem was in? Reporting on xbox live does not give you an option to describe the event that triggered you to report. I can see it working for something offensive on the dashboard but not in a specific game.
They can see your emblems. ms/xbl can see anything you make even through a game on the x360. Not hard for one to load a copy of the game up, since they have a copy of every made game, go to that gt and then look.