After much "WTF?-ing" a clarification was issued that explained the reasoning behind the warning. It (and this is what I suspected at the time) was that Blizzard felt that advertising such a guild would lead to a situation where "OMFG! you fags!" would be a commonly seen phrase on public channels, never mind the abuse that would be sent via private messages from the elite twelve year old boys who were playing Night Elf women.
Happily this has been resolved and made clear that it is not official blizzard policy to hold a group liable for the potential unpleasant response of people who dislike their perfectly legitimate behaviour. The guild leader had this to say.
" Blizzard Apoligizes to GLBT Friendly Guild!!! That's right! I have received an email from the head of Global Customer Service which included an apology for the way that their staff characterized my conduct, and that it was an unfortunate interpretation of their policy. They have removed the warning from my account. I will be posting the letter that Blizzard sent me on the guild website sometime this week so that you can see that advertising for your glbt friendly guild is NOT violating the TOS!!!
However, they say that their current policy (which I actually DIDN'T violate, thank you very much) is under review. What this means. . . we don't know. Are they reviewing it with their employees to make sure they don't make this awful mistake again? Are they reviewing and re-writing it? Whatever the case, Lambda Legal has sent them a letter offering to assist them in making sure the policy stays glbt friendly. "
All pretty cool, now everyone can get back to complaining constantly about how Blizzard hate their class, race, class/race combination, how they're constantly favouring one class over all the others, how the high level item sets are tilted in favour of certain classes and how the last four patches have done nothing but introduce new high level raid dungeons instead of anything a player could do on their own.
That last one is my own favourite, I'm starting to find the idea of spending four hours trudging through a dungeon with only a marginal chance of getting anything useful to be a bit dull.