The ruling was correct as far as I am concerned. To allow this would be to ignore the 1st and 14th Amendments and to allow this would act to endorse a religion in contravention to the aforementioned amendments and established law.
The facts according to the case include: "The first time Central held its graduation in the sanctuary, the cross was covered, apparently by accident. During subsequent graduations, the Church refused Superintendent Gibson’s requests to veil the cross, in keeping with a general Church policy against covering its permanent religious displays. The Church did agree, however, to remove any non-permanent religious symbols from the dais. The chapel used by Central for its senior honors night also contains a cross.
During the ceremonies, “graduating seniors . . . sit down in the front, center rows of pews of the [sanctuary’s] main level.” Guests sit in the other pews. The parties agree that “Bibles and hymnal books remain in all the pews,” as do a “yellow ‘Scribble Card for God’s Little Lambs,’ a pencil, a donation envelope entitled, ‘Home Harvest Horizon: offering to the work of Christ,’ ” and other religious literature. There is no evidence that any of these materials were placed in the pews specifically for the graduation ceremonies."
Finally, the court ruled: "conducting a public school graduation ceremony in a church—one that among other things featured staffed information booths laden with religious literature and banners with appeals for children to join “school ministries”—runs afoul of the First Amendment’s Establishment Clause as applied to the states via the Fourteenth Amendment’s Due Process Clause....We conclude that the practice of holding high school graduation ceremonies in the Elmbrook Church sanctuary conveys an impermissible message of endorsement. Under the circumstances here, the message of endorsement carried an impermissible aspect of coercion, and the practice has had the unfortunate side effect of fostering the very divisiveness that the Establishment Clause was designed to prevent."
http://www.au.org/files/2012-07-23 (89) Opinion on rehearing en banc.pdf