Sept. 21, 2009 -- For A.J. and Lisa Demaree, the photos they snapped of their young daughters were innocent and sweet.

But after a photo developer at Walmart thought otherwise, the Demarees found themselves in a yearlong battle to prove they were not child pornographers.

"I don't' understand it at all," A.J. Demaree told "Good Morning America" Monday. "Ninety-nine percent of the families in America have these exact same photos."

The eight photos in question were among a batch of 144 family photos the Demarees had taken to their local Walmart. The developer alerted the police and the investigation into child pornography began in earnest, even though the parents maintained they were innocent bath time photos.

The Peoria, Ariz., couple had their home searched by police and worse, their children -- then ages 18 months, 4 and 5 -- were taken from them for more than month. Their names were placed on a sex offender registry for a time, and Lisa Demaree was suspended from her school job for a year. The couple said they have spent $75,000 on legal bills.

A report issued by local authorities described the photos as "child erotica" and "sex exploitation," the couple's lawyer Dick Treon told "Good Morning America." He said the person responsible for the report was unqualified to make such judgments.

The Demarees are now sharing a few of the photos with the public, he said, so the "truth to catch up with the lie."

"These photos were never intended for anyone to see except for family members," Treon said. "Perversion is in the eye of the viewer."

Eventually, a judge threw out charges against the Demarees, but now they're going on the legal offensive by suing the state, the city and Walmart for their role in what they call a "nightmare."

"I think that we need to have an awareness of how our innocent photographs can be misconstrued and misperceived," Lisa Demaree said.

The Demarees are suing the city of Peoria and the State Attorney General's office for defamation. They're also suing Wal-Mart for failing to tell them that they had an "unsuitable print policy" and could turn over photos to law enforcement without their knowledge.

"At Walmart, we're committed to providing quality service and convenience to our photo customers," the company said in a statement. "These are sensitive allegations and we're taking them very seriously."

"It was unbelievable. I was in so much disbelief. I started to hyperventilate. I tried to breathe it out," Lisa Demaree told "GMA" this weekend, struggling through tears. "Some of the photos are bath time photos, 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."

Lisa Demaree told "Good Morning America" today that the girls seem to be doing well, but that her oldest is showing some signs of anxiety when she visits other people's homes. She calls her experience in state care as time at the "stranger's house."

"They're doing really well, I think, considering what happened," she said. "But sometimes we don't know the effects that children experience and are undergoing when they go through things like this."

House Searched, Children Taken

After Walmart alerted them, investigators went to the Demaree home to question them and search their residence where the children live with their parents.

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.

"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 said they found more photos and videos of the children frolicking without clothes.

Investigators and Child Protective Services saw it very differently and removed the children from the house.

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 said 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.

Police and prosecutors insist they did what they thought was appropriate.

"It took us a long time to take a picture [again]," Lisa Demaree 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?'"

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."

ABC News' Lee Ferran contributed to this report.