PEORIA, Ariz., Sept. 20, 2009— -- For Lisa Demaree and her husband A.J., it was the hardest time of their lives. It all began a year ago, when the Demarees dropped off some digital photos to be printed at their local Walmart in Peoria, Ariz.
"It was a nightmare, it was unbelievable. I was in so much disbelief. I started to hyperventilate. I tried to breathe it out," Lisa Demaree said, struggling through tears.
Among the batch of 144 family photos, the developer spotted eight photos that shocked her and she turned them over to police.
According to the police report, photos were of the children in provocative positions, with their genitals exposed.
"Some of the photos are bath time photos," Lisa said, "but there are a few after the bath. Three of the girls are naked, laying on a towel with their arms around each other, and we thought it was so cute."
Investigators went to the Demaree home to question them and search their residence.
A.J. Demaree said he could understand why the police were there, but he said the pictures were innocuous snapshots of his kids goofing around, and some of them involved the children being naked.
ABC News was able to obtain access to four of the photos. There are still nine other photographs which were not released because the Demarees' lawyer said that the photos were intended for private home use and showing them to outside parties would violate the law for distribution of child pornography.
"We have told our girls that they have freedom to be in their home and feel OK about their bodies and their nudity, but that there is a time and a place for it," Lisa said.
Police seized numerous videotapes and the Demarees' computers and found more photos and videos of the children frolicking without clothes.
"Our family is very open and comfortable. We don't want our children to feel inhibited in their own house," A.J. Demaree said. "If they want to run around in their underwear, if they want to go run and grab an old Halloween costume and throw that on and run around the house, or if they want to run around the house naked and play around, that's what we encourage."
Children Taken Away Over Controversial Bath Time Photos
The police and Child Protective Services saw it very differently.
The three children, ages 1½, 4 and 5 at the time the pictures were taken, were removed from the home and placed into the care of Child Protective Services.
It would be a month before A.J. and Lisa could regain custody of them.
A medical exam of the children revealed no signs of sexual abuse, and a judge ruled that the photos were in fact harmless.
ABC News legal expert Dana Cole says that in cases of child pornography authorities need to prove sexual intent on the part of the parents, and that after the judge reviewed the case and the Demarees underwent psychological evaluation, it was determined that there was no such intent.
From the Demarees perspective, the damage was already done.
"We went on a central registry of sex offenders. Our names went on that registry," Lisa said.
Lisa, who works at a school, was suspended from her job for a year while the investigation was under way, and the couple spent $75,000 on legal bills.
The Demarees have sued the city of Peoria and the State Attorney General's office for defamation and Walmart for failing to tell them that they had an "unsuitable print policy" and could turn over photos to law enforcement without their knowledge.
Police and prosecutors insist they did what they thought was appropriate.
"It took us a long time to take a picture," Lisa said. "I even worry about them in their bathing suits now, if I get a shot of them in their bathing suits and they're tilting their heads a certain way or their hips are sticking out a little bit, all I think of is 'Does someone think that it was posed? Or how is that going to be perceived?'"
Walmart says that these are sensitive allegations, and they are taking the matter very seriously.
Steve Meissner, a spokesman for Child Protective Services, released a statement saying, "When a police agency calls us on a matter, we have an obligation to act on that matter. If we refused, the community would be very unhappy with us."
The city of Peoria also states that it stands behind the appropriate actions of their officers.
"Honestly we've missed a year of our children's lives as far as our memories go," Lisa Demaree said, "As crazy as it may seem, what you may think are the most beautiful innocent pictures of your children may be seen as something completely different and completely perverted."