Good question Ken. And it seems like there are a lot of good answers already.
I find that ideas come to me from what I see, hear and experience in life as most of the answers already have said.
One of my favourite stories came out of something my son did when he was 3 years old. He started wiping off our good night kisses and it was a fun little game. It sparked a great story.
One other avenue for me is jokes. I like to take jokes that have a bit of a story to them and expand on them. Build in some back story and add a bit of drama. I've written several stories for my kids this way (and I plan on building a web site to publish them on soon 8=)