Hmmm... two parts to the question for me.
1) Do I think it's unhealthy? Not really. In fact, kind of the point of us doing it. Now, as fate would have it, I am actually more conscientious around one of our cats who has asthma, so I wouldn't do it if anyone in the room had a respiratory issue.
2) Do I think it sets a bad example? Well, I'd be a hypocrite if I didn't say... maybe. When I was a kid, my cool uncle smoked. I thought it was part of his being cool, and I was attracted to it as a result. I practised with Popeye candy cigarettes all the time - a kid's fascination, not an adult's reasoned decision. Now, did I have a cool uncle who smoked or smoking uncle who was (at least partially therefore) cool? Didn't matter. Soooo... I would want to make sure the kids were either too young to form an opinion/fascination or old enough to reason it through.