Weddings are for couples. They celebrate two becoming one. Engagement parties, on the other hand, celebrate the merging of two families. The guest list is traditionally kept small and includes immediate family members -- including children at the discretion of the engaged couple -- and close friends.
Children Are Optional
No hard-and-fast rules of etiquette exist regarding children at an engagement party. Because engagement parties vary from casual barbecues to cocktail parties, whether or not children are welcome will likely depend on the venue and theme. Engagement parties are traditionally hosted by the bride's family, so it will probably be up to the bride and her family to decide if they want children included, and if so, to make it clear on the invitations. Etiquette does state that everyone who is invited to the engagement party should also be invited to the wedding, so if the wedding is to be a child-free ceremony, so should the engagement party.
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