My DS talks about his dreams and bad dreams, but he hasn't woken up in fear of them as of yet, even though he does mention them. Actually, now that I think of it, he does wake in the middle of the night sometimes, but not often. And I will sleep next to him until he falls asleep. If he mentions it the next morning, I try to get him to tell me what happened in the dream and then I try (see I use the word 'try') to explain how dreams work. I guess maybe he is too young even though I explain it in 4 year old terms.
As an aside, DS has also already asked me what happens after someone dies? where is my penis? and who is G-d? Such difficult questions! Our babies are growing up so quickly.