Dreams may not be unreal, as the analogy we have been reviewing holds. They may simply be an alternative state of consciousness, equally real, if different, from our waking state. The fact that we wake from a dream and believe it is no longer existent is not sufficient to actually and absolutely conclude that the dream experience was unreal or illusory. Sri Aurobindo explains: “for it may well be that there are different states of consciousness each with its own realities; if the consciousness of one state of things fades back and its contents are lost or, even when caught in memory, seem to be illusory as soon as we pass into another state, that would be perfectly normal, but it would not prove the reality of the state in which we now are and the unreality of the other which we have left behind us. If earth circumstances begin to seem unreal to a soul passing into a different world or another plane of consciousness, that would not prove their unreality; similarly, the fact that world-existence seems unreal to us when we pass into the spiritual silence or into some Nirvana, does not of itself prove that the cosmos was all the time an illusion. The world is real to the consciousness dwelling in it, an unconditioned existence is real to the consciousness absorbed in Nirvana; that is all that is established.”
There are of course other issues to be addressed in terms of the reality or illusion-status of the dream state or of life itself….
reference: Sri Aurobindo, The Life Divine, Book 2, Part I, Chapter 5, The Cosmic Illusion; Mind, Dream and Hallucination, pg. 420