Hooray anecdotes!
Here's a pretty good assessment of it:
http://answers.google.com/answers/threadview/id/774928.html
One thing I don't think is in dispute: "Cry it out" works quickly and involves less exhaustion for parents and children.
It really seems to boil down to a big ol' "I dunno" from science, which is at least a bound on the virtues/dangers of the approach if nothing else.
As someone who is actually relatively interested in science, I have noticed that it isn't very helpful when it comes to parenting, except in a few cases which tend not to be very surprising ("hey, don't smoke around your baby"). The studies are so small and there are so many confounding factors I almost wonder why they try.
I'm satisfied with our outcome, nobody got exhausted and we're in a pretty good position now, but who really knows why?
Most parents don't want to hear this - but I think it's great! I don't have to participate in science-approved stimulation activities, I can just play with my kids.
We let both our girls (now 1 & 3) "cry it out." It was quite hard for a couple of weeks, but they both now have very good sleeping schedules. And, as far as I can tell, no psychological damage!
Sleep with your baby if you find it emotionally gratifying, but I'm skeptical that there's any significant benefit. It didn't work for us - my wife still wakes up occasionally from disturbing "baby in the bed" dreams.