I work from home with a 3 year old and 4 month old. It really hasn't been an issue for me. As long as you have a place where you can close the door[1] it's fine and it's really nice to be able to see the kids during lunch/break. It's just important to set ground rules: while you are working kids/wife don't interrupt you.

[1] I do need to wear headphones most of the time since it can be loud sometimes :)

+1. Working from home has worked phenomenally well for me, but my daughter is nearing 2 and she is easily (and rightfully) my biggest distraction. We're about to move into a new home where I have a dedicated office, which I expect to fix the problem...