The Dreaming World is the place where souls venture when the bodies of mortals sleep. It can also be visited by physically travelling there through the use of gate spells or similar means.

The Dreaming is primarily divided into two areas: The Slumbering lands and the Nightmare lands. Dreamers are people who enter the Slumbering Lands (or the Nightmare Lands) when their physical body is sleeping. They exist only in their own landscape called a dreamscape, primarily constructed by their own subconciousness. A dreamer cannot normally leave his own dreamscape. However, dreamcreatures, the creations and servants of the Dreamlord, can enter other people's dreamscapes at will.

Slumbering Lands: Dreamers in the Slumbering Lands perceive their dremscape as a friendly and happy place, depending on their personality of course. Memories of their journey will be that of a good dream. However, during sleep a dreamer can suddenly be transported into the Nightmare Lands. This transportation is not detectable by the dreamer, but the nature of his dreamscape is changed into a twisted version of his former dream, becoming an evil and frightening place.

Heartlands: This region exists outside the dreamscapes. They are sometimes referred to as the True Places by the dreamcreatures. Visitors entering the Dreaming World physically enter one of these places. Dreamers normally are not able to enter the Heartlands, but it happens from time to time. Certain Wizards and other strong-willed people have learned to leave their dreamscapes at will and to venture into the Heartlands (this is often referred to as Dreamwalking).

The Dreamlord: The true nature of this Entity is shrouded in mistery. It is believed that he is the collective conscience formed by the minds of the sleeping people. Others suspect that he is the Dreaming itself, an intelligent Plane if there is such a thing. In any case he is powerful enough to be ranked among the Immortals. In fact he is a very powerful immortal, but he has very litle to do with the immortal community. To communicate with others, the Dreamlord uses avatars. His Prime Avatar is called Oneiros, although it is unclear whether that is the name of the avatar or of the Dreamlord himself.
He uses the form of Oneiros to appear on the prime plane as well, to hunt dreamcreatures who've escaped the Dreaming or to fix problems with dreamers. It is Oneiros who manages the Dreaming on a daily basis with the help of the dreamcreatures.

There are rumours that there are other avatars of the Dreamlord as well who are living in the Nightmare Lands. (See more on this in the Ravenloft Accessory: The Nightmare Lands.)

The Wallaran Dreamworld is a special case of Heartland. This place exists both in the Dreaming World and in the Spirit World. There are many other links between these worlds. For more information on the inhabitants of this area, see the Savage Coast Monsterous Compendium (available at TSR's Website -Red Steel section).

Inhabitants: Dreamcreatures, Malfera, Dreamspirits, Dreamshades, Dreamers.

The Nightmare Dimension: Some Nightmare Dreamcreatures have found a gate into the the Nightmare Dimension where they have gained true existence, beyond Oneiros' grasp. The Malfera is one example of such creature. It is not commonly known (at least to Dreamwalkers and Dreamcreatures) how this happens, but it seems that Dreamcreatures can exist only inside the Dreaming: once they get to any other plane or dimension, they simply vanish. The Nightmare Dimension is the only exception so far, and thus many dreamcreatures who want to escape Oneiros' control try to enter that remote dimension...

How Nightmares Were Created
Oneiros once was the Ruler of the Heartlands and of the Slumbering Lands, while the Nightmare Lands didn't exist. But one fateful day the worst thing happened to him: he fell asleep and dreamt. And in his dreaming he generated a nightmare. When he awoke, he discovered he had created the Nightmare Lands and that he had also created Nightmares that polluted the dreams of every sleeping creature. He tried to gain control of this land and to destroy it, but he found out he could not, for the lord of the Nightmare Lands was his dream-self that had come to life: the Nightmare Man. He then started fighting a battle he could not won, a battle against himself.

The Dreamwar raged for many centuries (millennia?) and finally came to an end when the Nightmare Lands vanished from the Dreaming... almost. They became surrounded by a strange opaque mist, and from then on, nothing ever came out of that land.. but many were drawn into. The Nightmare Man had been noticed by the Dark Powers and trapped halfway between Ravenloft and the Dreaming, still able to influence the sleeping creatures but unable to enter again the Dreaming. Only the dream-selves of the sleepers can strangely come back and forth from the two lands, but given the fact that none of the Nightmare Court memebers can dream and that Oneiros doesn't want to risk another rift of his realm, they cannot interact anymore.

Just to clarify things a bit, here's what it's written in the Nightmare Lands set about their location (from Book 2: The Rules of Dreams and Nightmares, pages 5-6-7-8):

NOTE: the following text is copyright material of TSR Inc. The use made here is only referential and not lucrous in any way, so please TSR guys don't sue me, ok?

   "Surrounding the Prime Material Plane are the mists of the Ethereal Plane. The Ethereal Plane consists of 3 distinct parts: the Border Ethereal, the Wall of Color and the Deep Ethereal.
   The Border Ethereal touches the Prime, but it's really a place of both dimensions. When someone is in the Border, he's here and there at the same time. [like Ghosts, for example -My Note] (snip a bit)
   The Deep Ethereal is like a vast ocean, with islands of Matter called demiplanes floating in its endless mists. [this is where the Nightmare Lands are located. The concept of Deep Ethereal is absent in D&D Multiverse -My Note] (snip another bit)
   Between the Border and the Deep, a shimmering wall of color stretches to separate one part from the other. It's a two dimensional boundary, having width and lentgh but no discernible depth. [this is the Wall of Color, also called the Dream Plane -My Note] (snip)
   The Dream Plane exists in the extradimensional, infinitesimal width of the Wall of Color. It is not a solid, travel-inhibiting barrier, but a translucent expanse of bright patterns of harmless energy. (snip)
   When a person dreams, a portion of his inner being interacts with this plane. This dream-self mantains a connection with the physical body but also passes into the dream plane in order to participate i normal dream scenes.
   The exterior of the Wall of Color, the true boundary between the waking world and the dream plane, is known as the Veil of Sleep. In common dreams, only a dream-self can cross it and enter the extradimensional space of the dream plane. (Planar travelers simply pass through the Wall of Color and enter the Deep Ethereal. They cannot get to the extradimensional space that exists between one side of the wall and the other.) [inside the dream plane, each dreamer has his own dream to experience, even though it can happen that two dreamers share the same dream, a rare occurrence -My Note] (snip)
   Ethereal travelers wandering near the Wall of Color can't see the multitude of dreams playing out within its shimmering surface. For one thing, those who are awake cannot cross or see through the Veil of Sleep. (snipped a long part)
   Individual dreamers provide the energy that keeps dreamscapes coherent. Once a dream ends and the dream-self returns to the waking world, the dreascape he occupied dissipates back into the mists. All of this usually occurs without any conscious knowledge or action on the part of the dreamer. (snip)
   While each sphere [dreamscapes occurs inside spheres -My Note] has a certain size when viewed from outside, the inside of a dreamscape is as large or as small as it needs to be to contain the dream scene. Time also flows differently within a dreamscape. Hours, months or years may pass over the course of a dream, but the dreamer only dreams for seconds or minutes."

So that's it. The Dreaming should lie within this extradimensional Veil of Sleep inside the Ethereal Plane: a fascinating hypothesis that could hold also in the D&D Multiverse (just make the Veil of Sleep/Wall of Color lie between the Ethereal and the Astral et voilà!)