I filed married and 0. Should my wife file married and 2?

Per the directions on the W-4 it would seem appropriate for your wife to claim 3 personal allowances: 1 for herself and 2 for the children.

The fact that you claim 0 personal allowances may cause you to get a bit of a refund at the end of the year, as 3 allowances would seem to be correct for you as well. The goal is to be as close to $0 owed and $0 refund as possible - so I suggest try it for a year and see how it works out. Then next year you can file a new W4 with your employer if you want to raise the number of personal allowances you claim.

I am going to disagree with ebaines on this one and suggest that you keep your W-4s exactly where they are.

ALL of your wife's income is taxed at your marginal tax rate, which is probably AT LEAST 15%, with a significant chunk at 25%. I am speculating here because you did not give us your income levels.

However, in such cases, I think it is better that you play it safe and OVER-withhold. If you get a large refund, then you can adjust the W-4 next year. Most families would find it to be a significant hardship to have to come up with several thousand dollars to send the IRS come 15 April 2012.