I have not read the other responses, so bear with me if I am repeating information you already have :)
Yes, I believe it is best to sleep with your babies. IF you do it safely. That means, no cracks between bed and wall, pillows and blankets safely out of the way of potentially being in baby's face, having bedrails securely up, or baby sleeping in the middle of the bed where they can't fall out. Also, don't sleep with your baby if you have sleep apnea, are an extremely heavy sleeper or if you are on medication or under the influence of alcohol, etc. that would cause you not to wake up or to not be able to respond to your baby's cues.
Having said that, I slept with daughter #1 until she was 3 yrs and then moved her to a mattress alongside mine (on the floor) and then across the room, and finally to her own room when she was 5 yrs. She is a happy, well-adjusted girl. I am currently sleeping with daughter #2 who is 13 months. Co-sleeping allows us to breastfeed at night without me having to lose as much sleep as I would if I got up out of bed, etc.
Co-sleeping CORRECTLY and SAFELY does help reduce the risk of SIDS. The reasons are biological- the baby is very in tune with the mommy's body. This is the SAME principle that the new SIDS info is going on when they say to put the crib IN your room to reduce the rates of SIDS. They aren't giving you the full story though. Not only is the baby just "in tune" with you, but IF the baby is IN your bed and you are facing the baby, and baby stops breathing (apnea) then you exhale, the involuntary rxn is for the baby to INhale your breath, thereby starting the baby respirating normally again. This has been proven.
Also, funny thing, the US has one of the highest rates of infant mortality in the civilized world and we are one of the only countries in the civilized world who don't sleep with our young. We are pack animals whether we like to believe it or not. Mommies should follow their instincts on this and the ones who actually DO co-sleep should stop hiding it in shame. My pediatrician even knows I co-sleep and he is a very mainstream dr and is totally fine with it.
Okay, one more thing- the spitting up. I have been through 2 daughters, one nephew, and a lot of friends who have this problem. My daughter #2 would spit up at 3 months so badly at night that it was literally choking her with HUGE chunks and she would not be able to breathe sometimes. It scared me silly. After many meds, reading, dr appts, etc. I finally hit on something that WORKED. She is sensitive to dairy. I was breastfeeding (thank goodness not formula feeding- that might have killed the poor child with all the cow proteins) and I completely cut dairy out of my diet. After a few days, I saw a little difference, and after about 3 weeks, she was a totally different child. No more HUGE spit-ups, just the regular baby ones. (You can totally tell- the allergic/sensitive ones are thick, undigested curds and SMELL nasty!) She didn't just outgrow it either, because everytime I would have the slightest bit of dairy, she would start spitting again.
Nightmares thing- I bet it has to do with the heartbeat thing- he feels better nestled next to mama and more secure. Swaddling might help, but being next to you is best. Enjoy it, even though it is sleep-depriving sometimes. In 3 months, believe me, you'll be saying, "OMG, Remember When...."
:)
M.
PS- Don't let anyone tell you you are "spoiling him" or he'll never sleep alone either, that is just bunk! :)