Writing in dissent, Chief Justice Rehnquist argued that the CPPA was merely a natural extension of Ferber, and the new law seemed intended to be used only to prosecute those individuals distributing materials known to use real children. Holding: Court's reasoning and policy implications:

Justice Anthony Kennedy, writing for the majority, found in favor of the Free Speech Coalition, and affirmed the judgment of the Court of Appeals to strike down the relevant statutes. Critical to Kennedy's decision was the government's radical reformulation of the obscenity standard in Miller. To be banned under the CPPA standard, the materials in question "need not appeal to the prurient interest. Any depiction of sexually explicit activity, no matter how it is presented, is proscribed," even though there was no clear physical threat to a child, according to the Ferber standard. The government was suppressing lawful speech (speech not using children to produce sexual content) in an effort to suppress unlawful speech, alleging that allowing sexualized images...

Kennedy found the government's contention that created images of sexualized children were the same as real images of children in the eyes of readers to be implausible, and overly broad in terms of its legal outreach.
The court's ruling was important, not simply because of its implications for pornography statutes, but also because of its relevance to the regulation of all online and 'photoshopped' images. Had the CPPA act stood, conceivably creators of online images could have been held responsible for the potential thoughts and impressions their creations might inspire: the creation of violent or sexual images, if it could be mistaken for the 'real thing' could be subject to censorship, simply for appearing to suggest that someone was treated in a violent or sexual manner.

Reference

Ashcroft v. Free Speech Coalition. (2002). University of Cornell. Retrieved March 14, 2010.

http://www.law.cornell.edu/supct/html/00-795.ZO.html