I applied for passports for my three kids last week. I too was under the impression that a small child could travel on his mothers passport until they were older. The woman at the passport office told me that as of 12/31/05 everyone, including small children had to have their own passport. She also said that if I did not want to go ahead and get my 13 month old son's passport done now, I would have to take him to the DMV and have a picture id made for him to travel to the Bahamas in October. I'm not sure if that is accurate, but I went ahead and got all three kids and now I don't have to worry about it for the next five years.
It ended up costing a little over $300.00, but I am sure that you can save money by having the picture taken somewhere else. I think you can even take the picture with your own digital camera. I just wanted to get it done quickly, I was afraid I would wait too long and get stuck in the mad rush of people trying to get their passports by the end of the year. Hope this helps!