I ran a dream-based game once, though it never got past the first few sessions due to RL issues.
People were dying all around Waterdeep, found in their rooms, in their beds, savaged as if by wild animals (even if someone else was in bed with them). PCs poked around and discovered that several of the victims had gone to see a performance by a master bard illusionist. They went to the show, and felt some sort of weird subliminal shit going on with the illusions. That night they woke up (even the elf in the party) in a dreamscape, an alternate Waterdeep that was mostly abandoned and run down, with weird shadowy monsters and creepy happenings all over the place (some random person died and the pool of blood crawled away, for example). There were others from the show around, getting attacked, and the overcast sky (lit from beneath by burning buildings) occasionally flashed with the symbol of a skull surrounded by purple flames. The party joined together and survived the night, at which point they all woke up from where they had fallen asleep and it was morning. They tracked down the bard and tried to interrogate him, but he committed suicide.
That was about where the campaign died. The next few sessions were going to be that they experienced a progression of more and more horrifying dreamscapes, and that the nightmares were going to start spilling into their waking senses. As more and more people (high profile members of the city) fell prey to the nightmare disease, the city would devolve into chaos. Eventually, the party (assuming they survived each layer of the dreamscape) would reach the center, a forbidding black tower surrounded by nightmare beasts, where they would have a chance to destroy the entire construct.
