Did the Embassy person say anything about WHY this is complusory?
It is complusory because of new laws which the state department has put into effect March of 2004.
With regards to the Consular Report of Birth Abroad it is essentially the American birth certificate proving your child was American from day one. Whitout one it would make it difficult for them to be in the military, serve in the goverment at any level etc.
If you don't register and continue to enter the US on another passport and you don't get caught, great! Just be warned that Immigration is getting more firm about inforcing the laws. If an airline thinks their could be a claim to American citizenship and you are going to the states the airline does have the right to refuse you on the flight due to the fact that they get fined if you are caught.
Also if you don't register your child and get their passport it will make it very, very, very, very difficult for them to ever claim their American citizenship, not to mention costly and time consuming.