Aside from some good anecdotal pieces here, research shows that communications are the critical factor of successful telecommuting. Trust is based on communications, and you can't work effectively in an organization without trust.
Face-to-face communication is enormously disruptive to engineers, to the extent that -- even when I worked on-site -- I would spend 90% of my time communicating with other engineers over IM. At one company, I worked across the desk from another engineer, such that I could reach out and touch him. Yet we'd say good morning to each other, and we'd go to lunch together frequently, but the entire rest of the time we'd communicate via IM.
Engineers need to talk with the management and clients for three reasons: 1) To get the specification 2) to clarify the specification during development and 3) to get feedback during testing/qa. The only component of that which needs to happen during development is #2 and seeking clarification is engineer-driven, so if the engineer doesn't have a problem with picking up the phone or sending an email or scheduling a meeting (activities I do constantly with clients) then it's not a significant barrier.
One fourth type of communication between management and engineers is what I like to call "comfort talk": management hovering around engineers asking for "status updates," or small-talking about an unrelated project, or asking for an explanation of some technical point or the other, or fishing for some decision that needs to be made so that he can make it himself.
I call this "comfort talk" because most of it is useless but it makes the manager feel involved in the project. They don't want to do it over IM because IM doesn't give that same comfy feeling, and they can do it by phone, but there's a mental barrier to picking up a phone that makes them reconsider if it's important. It's much easier to roam over to an engineer and hover behind him until his concentration breaks.
Of course "comfort talk" is (almost never) beneficial to the engineer or his productivity. In fact it's the enemy of productivity. I still have to put up with a good deal of it by phone when working remotely, but far far less than I would in person (due to the mental barrier). The reduction in this "communication" is a godsend to me but makes the relationship feel less comfy for the manager, so once again we’re talking about psychological issues on the part of management.
Communication is essencial and harder to manage if just one member is virtual. So, it may not be worthwhile to manage just that one member differently, hence the requirment for "on-site" programming.
I can not, for the life of me, understand why that is such a sticking point with so many people. Fortunately I have enough people who are willing to work with me anyway that I can forget about the ones who don't, but it seems mind-numbingly obvious to me that if you're desperate for the skills I have, you should be willing to work with a requirement that doesn't cost you anything.
As near as I can fathom, it's a psychological thing. Remote people don't seem like they're part of your "empire" as you look out across the office and see all the busy beavers hunched over their computers.