Here is a pretty good article over on Web Worker Daily about managing your home office. 

I do sit on the fence as far as letting the kids play in the room or closing the door to my office when I work from home.  Usually the door is open and they can come and go as they please.  Sometimes though, you have to close the door.  You just need the privacy or the silence.

One thing that has worked well recently is having the XBOX 360 in the room, and the demo version of Lego Star Wars.  That will keep my oldest son entertained.....really for too long.  He would play that game all day if I let him.  Also, it really makes for an interesting conversation when you are talking on the phone with a client and your son or daughter starts yelling "Dad!  Dad look!  I'm shooting this guy!!!!"