He wants to have his cake and eat it, and he can't. But he needs to decide what is more important: being with you or having a child. The solution he suggests has the potential to be messy and painful all round, and I can't imagine what all that would do to a kid.
I agree totally. If he knew your feelings from the beginning, then it's really his issue to deal with. From where I sit, he made his choice when he chose you. It's comepletely unfair of him to expect you to just change your whole life's plan just because he "needs" to pass on his name. I think the surrogate thing is a bad idea. Have you guys thought about counseling? I know it's tough but if he can't come to terms with your decision and you guys have to end the relationship, wouldn't you rather know this now with 5 years invested rather than 10, 15, 20?