The "war on terror" may be eroding human rights an civil liberties, but it is also giving us some of our strongest language in defence of freedom. First, we had the Supreme Court's memorable statement in Hamdi v Rumsfeld that
[A] state of war is not a blank check for the President when it comes to the rights of the Nation's citizens.
There are no hereditary kings in America and no powers not created by the Constitution.
and that therefore, the Administration's "arguments" about the "inherent authority of the President as Commander in Chief" are bunk. Even in a time of war, the President is bound by the constitution and the law. He is not, in the infamous words of Nixon's lawyers,
...as powerful a monarch as Louis XIV, only four years at a time, and is not subject to the processes of any court in the land except the court of impeachment.
What of the decision? It is exactly as you would expect it to be: warrantless wiretapping violates the Fourth Amendment prohibition on unreasonable searches and seizures. It violates the Foreign Intelligence Surveillance Act, the law Congress has established to govern wiretapping by the intelligence services, and the Separation of Powers, which vests legislative power solely in the Congress, and charges the President to "take care that the laws be faithfully executed". In this case, it also violates the plaintiff's First Amendment rights to freedom of expression and association, on the grounds that it chills expressions and associations with various people they communicate with in their professional and private lives (the plaintiffs are a group of lawyers and academics, who regularly communicate with people in the Middle East in their line of work). While Congress has authorised the use of military force against those responsible for the September 11th attacks, this was not a blank cheque, and cannot override existing legislation without explicit authority to do so (but even then, unconstitutionality would still apply; Congress can't authorise the President to violate the Constitution). So, the scheme is illegal and unconstitutional, and the Court has ordered the government to stop it immediately.
(Glenn Greenwald has a more thorough analysis here).
The Administration is appealing, of course, and this is likely to go all the way to the Supreme Court. The most likely target of an appeal will be the Court's dismissal of "state secret privilege" at the beginning, on the basis that the plaintiffs could establish a prima facie case based solely on publicly released material. A higher court reversing that decision would effectively nullify the whole judgement, but also leave the US in the rather interesting position of having a court say "what you're doing is illegal and unconstitutional - but no-one can go to court and argue it". In a country which is supposed to be "a nation of laws", that's an extremely problematic position to uphold.