A few technical notes: I used a resolution of 384 ppi, which scales down nicely to 96 ppi; 96 is a commonly used resolution for on-screen viewing, and 384 is comfortably above the minimum needed for printing. I also didn't use any anti-aliasing.
Here's the solid shading I did in Illustrator:

This is just black, white, and gray. Very simple. I put the white highlights and the black shadows on their own layer and made 9 copies.

I did this so I could stagger different levels of Gaussian Blur. I pixel-selected the top layer and the gray midtone layer together. I left the top layer alone, blurred the next layer by 1 pixel, the next by 2, the next by 4, and so on, doubling the amount on each layer downward. On the last layer, it was supposed to be a 256-pixel blur, but the filter only goes up to 250, so I applied a 128-pixel blur twice.

This was the result. You may not need this many layers, depending on how big your piece is. I just went as high as the filter would go (and a little beyond, but who's counting?). Now, there's a reason I don't use anti-aliasing. If I did, there would be gaps all over this pic between the layers, and I don't want that. I want pixel-precision.
Next I pixel-selected the midtone layer, merged all the layers together, and applied "Equalize" to the selection.

This looks great on its own, but it kind of looks like the characters are made of glass. Not that glass furries aren't crazy awesome, but that's not what I was going for. So I roughened it up a bit. No, I didn't go anywhere near "Add Noise". That's the coward's way out. What I did is head up to Image -> Mode -> Indexed color.


Smashing! I've destroyed that conspicuous digital look, and any imperfections have been rinsed away in pixel rain (Pixel raaaaaaain! Tiny squares of light invade your brain…)
The other reason I switched to Indexed Color was so I could easily change the highlight and shadow colors. Of course, we have to swtich back to RGB color to do that. These are the colors I usually use:
| Highlights | Shadows |
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After I changed the colors, I separated the shadows and highlights into their own layers, and grouped them together.
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These settings, of course, are just suggestions. Feel free to change them to whatever you think looks good.
Here's the smooth shading group with the colors underneath:

Smooth as silk. I tried getting this effect in Illustrator with things like blends and gradient meshes. It was complicated, it took forever, ate up resources, and it just didn't look right. In Photoshop, this took about five minutes, tops, and the result is exactly what I wanted.