Especially in the software industry, a topic that gets revisited again and again is that of working from home vs. working in an office. There are those who seem to believe that working from home is a thoroughly bad idea, and at the other end of the spectrum there are companies that are entirely locationless, with all of their employees working from their own homes.
I worked for 12 years, for four different companies, from home. All four companies were headquartered in Silicon Valley, and I live in the suburbs of Washington, D.C. I worked from my home, except that I visited headquarters for a week at a time, at intervals ranging (depending on the company and on where we were in the release cycle) from once per month to once per quarter. At the first company, I had worked in the office in California for 18 months before I moved to D.C. At the second, a startup, I moved to California for the first 6 months, then returned to D.C. The remaining companies, I entered cold, working from home from the beginning.
Now, for almost two years, I've switched to the other extreme. I work for a local company, and due to the nature of the work it must be done 100% in the office, and typically only 40 hours per week.
The first thing that people always seem to talk about is productivity. From my own experience, I can report that I was at least as productive at home as I am in the office. However, that claim can be a little misleading; I was more personally productive, but I made fewer contributions to other developers' work, and in general I now do a lot more of that and more generally facilitating the work of others. All in all, I would say that the net sum is about even; however, as my career advances, my job becomes more about collaborating, overseeing, and facilitating others and less about my own productivity, so it becomes more important to have the kind of face-to-face, high-bandwidth contact that you get in an office. Indeed, this is a big part of the reason why I finally stopped working at home in favor of working on-site. Proponents of telecommuting are quick to point out all of the ways that modern technology facilitates communication: Not just phone, but instant messaging, wikis, chat clients, screen sharing and collaboration software, video conferencing, and on and on. These things definitely help - I was certainly able to be more effective in the later days of high-speed broadband than I was at the beginning with nothing but phone and 128KB/sec ISDN - but they're still a pale shadow of being together in person in front of a whiteboard.
In some ways, a good telecommuter turns this handicap into a win. You do more of your design up front, and more carefully and thoroughly, because that reduces the need for high-bandwidth communication throughout the development process. You do this design work during those times when you are together face to face. As a side effect, careful design at the beginning leads to better software. On the other hand, it is impossible to nail down all of the design up front; inevitably you figure things out during development that require changes, sometimes large ones, in the architecture of the system. Here, being geographically distant becomes a real hindrance; what happens is generally that the lead architect comes up with a design, and then the other members of the team critique it, and in my experience the result is often inferior to what would have come of true collaboration through the entire design.
As far as your work schedule, being at home is obviously very flexible. This is both good and bad. It is good because you can work when you are most productive. I am a lark, and I am at my sharpest first thing in the morning. At home, I could go straight to work when I woke up; now, I spend 90 minutes of what would be my most effective time of day showering, getting dressed, and commuting. Similarly, you can put that flexibility to work on a larger scale: If you are having one of those days where you just can't seem to focus, just step away; clean the house, or take a 3-hour lunch, or get a white chocolate mocha. And on those days when you are really in the zone, you can work 12 or 14 hours while still having a few hours with your family. I also found it easier to stay focused on work in general, because my hours were all mine; not only was there none of the kind of non-productive water-cooler BS'ing that you do in the office, but I also spent very little time surfing the web, reading XKCD, and the like, because it was easy to see that the time I spent doing so was mine. You can also move your schedule around to enable more time with your family; I typically got up very early and did an hour or two of work before anyone else woke up, and did another hour or two of work after the kids went to bed, thus freeing those hours during the day for family time.
The downside is that it's hard to maintain any kind of work-home separation. You feel like you are always at work, or at least like when you're not at work, you should be. Exacerbating this is the fact that the bulk of my teams were in a timezone where it was three hours earlier, so I often fielded calls and IMs through the dinner and kids' bedtime hours. Similarly, despite my constantly telling them not to worry about it, my coworkers were loathe to call me when they knew it was my evening, and so whatever issue they had got delayed until mid-day (i.e. their morning) the next day.
Some telecommuters report having trouble staying focused on work, with the constant potential distractions around: Housework to be done, kids to play with, etc. I never had much of a problem with this; I'm a fairly disciplined person, and I love what I do, so except for those occasional times I mentioned where focus is elusive, the call of the laundry was rarely louder than that of the work. Any anyway, a lot of household tasks, like laundry, don't require require a lot of attention. But if you're the sort who has trouble focusing on work at home, then working at home simply might not be for you. It's also notable that my wife was home during my core work hours, and she ran interference with the kids and such.
Another factor to be considered is the social interaction of being around other people. If you are the sort who needs this on a regular basis, then working at home is probably not for you. However, many software people, even in the office, spend most of their day hunkered down in their cube, talking to others only when work requires it. For such people, being at home may not make much of a difference in their social schedule.
Another important factor is that employees who want to work from home are happy doing so. The effect of this is often underestimated; a happy employee is a productive employee. For many of us, giving us this kind of flexibility and trusting us to do the work in whatever way we find most effective has an incredible ROI in terms of employee productivity.
Most of this applies to the line engineer, a leaf node in the org chart. Things get much more difficult when you need to manage others, or to lead efforts with multiple developers. Then, it becomes not just about you; those other developers need to interact with you, both for technical guidance and for the more touchy-feely managerial stuff. It can be done, especially if you're really proactive about communicating with them and giving feedback, but it's hard and arguably inherently less effective than being together in person. Again, this is why I stopped working at home; I reached a point where I felt that the level of leadership I needed to do could not be effectively accomplished remotely. At least, not by me.
Finally, note that for really great developers, you may not have a choice - they either work from home or they don't work for you. Folklore says that an outstanding developer is many times more productive than an average one, so even if such a person isn't quite as effective from home as they would be from an office, hiring them can often still be a net win. Certainly the companies I worked for were happy with my performance working from home.
The bottom line: A leaf-node developer, if they have the right discipline and temperament, can be every bit as productive as a telecommuter as they could in the office (if not moreso). As their responsibilities of leadership and mentorship grow, this will become increasingly difficult, until a point where they may not be able to effectively do their job remotely. Even for such people, though, the need to be in the office isn't constant, and while I haven't ever been in a situation where this is possible, I believe that even a manager could effectively spend a day or two a week working at home.
Update: I found this study interesting, and it squares well with all of my experience.