The interchange of ideas between neurobiology and psychoanalysis needs to include the latest ideas of both fields. Psychoanalysis has greatly revised its theory of dream formation and the clinical approach to working with dreams, including the role of disguise in dream formation and the need for associations in dream understanding. Both the Freudian and the activation-synthesis models of dream formation are two-stage; neither two-stage model may best account for the data. Whereas Jung describes dreaming as an analogue to schizophrenia, and Hobson considers it an analogue to delirium, we need to also attend to the ways that mental functioning during dreaming may be superior to waking functioning.