Here's the article
http://www.usatoday.com/news/education/2007-04-24-student-assassin-game_N.htm
As for the PR -- I'd say it's a win. People who are going to be interested will find out about you and the controversy makes you interesting.
I think a lot of players understand that they let terrorists/fanatics win if they decide to stop playing and having fun because of those crimes. True, people will understandably be more sensitive to this and go through a respectful down-period of mourning. But ultimately, the bad guys can't be allowed to suck the fun and joy out of life forever. They can't be allowed to win, and your site does a good job of preventing that ;)
On the business side of things - $2 does seem a bit steep for college kids. I know a lot of folks that would just do the game by hand rather than pay that much per person. That doesn't mean you have to lower your list-price though. In fact, you shouldn't. What would be more viral and fun (and educational for your pricing) would be to give out discount codes or to have a special discount assassin week. Then you could play with the pricing - $1, $0.50, etc per person and see how much more demand you get at different price levels. The goal of course is to maximize total revenue. That would also be a good way to introduce new users to your system that otherwise would avoid it and also create more viral spreading for your site.