A recent clinico-anatomical study of the dreams of 332 neurological and neurosurgical patients suggests that the essential psychological processes of dreaming are mediated by higher forebrain structures (inferior parietal and mediobasal frontal lobes in particular) rather than the primitive brainstem nuclei which regulate REM sleep. The fundamental neuropsychological mechanisms involved in dreaming appear to be (1) inhibitory mental control, (2) spatial thought, and (3) quasi-spatial (symbolic) operations. The essential factor in REM sleep, by contrast, is basic arousal. These neuropsychological findings call into question prevailing theories (based on physiological evidence) of the relationship between dreaming and REM sleep. Dreams and REM appear to unfold over different anatomical structures, and they involve different psychological mechanisms. The implications of these findings for psychoanalysis are discussed in this paper.