I've never used one, but I have actually seen those boxes in real people's homes. They do exist.
I also have doubts because I can't see their customer base ever being ok with the word "penis", regardless of whether it is a medical term. So I can't see them making that substitution in their dictionary. Although, I wouldn't be surprised if they outsourced it and only provided a list of words to substitute that was incomplete and left choosing the substitutions up to the dev.
The box, as described by vidarh, would turn "Dyke" into "Gay".
The "penis" one refers to a joke told by Mary Tyler Moore on Letterman back in 1993, https://youtu.be/vhAv8Aowb9w?t=413 .