Biological process of human dream

1st stage:

Dreams are the memories of our semi-conscious thoughts and experiences

that occurred when we were asleep. As far as we know, all mammals
dream. Some animals (but not Humans) can die from lack of it1 - sometimes
even faster than dying from starvation2. Dreams are inherently interesting,
and have been investigated and discussed for as long as there are written
records.
On average us Humans spend two hours a night dreaming
They "tend to occur throughout the sleep period [and] generally speaking,
most organized and detailed dreams occur during REM sleep"
The cortex is the most recent part of our brains to evolve, and is generally
said to be responsible for our 'higher functions'. The interaction between
our limbic system and the cortex is responsible for our conscious
experiences of emotions and sensations. The cortex is 'highly active' during
REM sleep, despite the fact that most external stimulation is cut off.
According to the activation-synthesis model dreams are a result of our
cortex/mind interpreting the 'random' and unregulated processes of sleep
as if they were real events
The activation-synthesis model of dream interpretation holds that the
basically random source of electronic information causes the activation of
specific areas of the cortex. This randomness underpins the
resulting synthesis that our cortex tries to make of it.

Lucid Dreaming:

“According to Stanford psychologist Stephen P. La Berge, lucid dreaming

is most likely to occur during the last dream cycles of the night. La Berge
states that, during a lucid dream, you are aware that your "experiences" are
dreams rather than reality, and you can remember the dream quite well
after you have wakened. Sometimes you can even evaluate what is
happening during the dream, and take an active role in resolving the
conflict that occurs.
Infants' Dreams
An unborn baby at 32-36 weeks will have the thalamo-cortical neural
networks in place that facilitate conscious awareness. Prof. Koch notes that
an unborn baby at that point is almost permanently asleep and sometimes
in REM sleep; although we do not know to what extent late unborn babies
dream, there is evidence that they feel "the way we do when we are in a
deep, dreamless sleep". Later:

“Dream content is informed by recent and more remote memories.

Longitudinal studies of dreaming in children by retired American
psychologist David Foulkes suggest that dreaming is a gradual cognitive
development that is tightly linked to the capacity to imagine things visually
and to visuospatial skills. Thus, pre schoolers' dreams are often static and
plain, with no characters that move or act, hardly any feelings and no
memories.

REM sleep:
Whilst falling into deep sleep, our brain goes through a series of stages.
These stages cycle throughout the night, differing according to our different
sleeping patterns and internal states. Different patterns of waves, as
measured on ECGs, characterize different stages of sleep.
Our eyes go through bursts of movement during REM sleep, sometimes
with a few minutes in between bursts. During a full undisturbed night's
sleep four or five periods of REM sleep is normal, each one being longer
than the one before.

2nd theory:
For centuries people have pondered the meaning of dreams. Early
civilizations thought of dreams as a medium between our earthly world and
that of the gods. In fact, the Greeks and Romans were convinced that
dreams had certain prophetic powers. While there has always been a great
interest in the interpretation of human dreams, it wasn’t until the end of
the nineteenth century that Sigmund Freud and Carl Jung put forth some
of the most widely-known modern theories of dreaming. Freud’s theory
centred around the notion of repressed longing -- the idea that dreaming
allows us to sort through unresolved, repressed wishes. Carl Jung (who
studied under Freud) also believed that dreams had psychological
importance, but proposed different theories about their meaning.
Since then, technological advancements have allowed for the development
of other theories. One prominent neurobiological theory of dreaming is the
“activation-synthesis hypothesis,” which states that dreams don’t actually
mean anything: they are merely electrical brain impulses that pull random
thoughts and imagery from our memories. Humans, the theory goes,
construct dream stories after they wake up, in a natural attempt to make
sense of it all. Yet, given the vast documentation of realistic aspects to
human dreaming as well as indirect experimental evidence that other
mammals such as cats also dream, evolutionary psychologists have
theorized that dreaming really does serve a purpose. In particular, the
“threat simulation theory” suggests that dreaming should be seen as an
ancient biological defence mechanism that provided an evolutionary
advantage because of  its capacity to repeatedly simulate potential
threatening events – enhancing the neuro-cognitive mechanisms required
for efficient threat perception and avoidance.
So, over the years, numerous theories have been put forth in an attempt to
illuminate the mystery behind human dreams, but, until recently, strong
tangible evidence has remained largely elusive.
Yet, new research published in the Journal of Neuroscience provides
compelling insights into the mechanisms that underlie dreaming and the
strong relationship our dreams have with our memories. Cristina Marzano
and her colleagues at the University of Rome have succeeded, for the first
time, in explaining how humans remember their dreams. The scientists
predicted the likelihood of successful dream recall based on a signature
pattern of brain waves. In order to do this, the Italian research team invited
65 students to spend two consecutive nights in their research laboratory.
During the first night, the students were left to sleep, allowing them to get
used to the sound-proofed and temperature-controlled rooms. During the
second night the researchers measured the student’s brain waves while they
slept. Our brain experiences four types of electrical brain waves: “delta,”
“theta,” “alpha,” and “beta.” Each represents a different speed of oscillating
electrical voltages and together they form the electroencephalography
(EEG). The Italian research team used this technology to measure the
participant’s brain waves during various sleep-stages. (There are five stages
of sleep; most dreaming and our most intense dreams occur during the
REM stage.) The students were woken at various times and asked to fill out
a diary detailing whether or not they dreamt, how often they dreamt and
whether they could remember the content of their dreams.
While previous studies have already indicated that people are more likely to
remember their dreams when woken directly after REM sleep, the current
study explains why. Those participants who exhibited more low frequency
theta waves in the frontal lobes were also more likely to remember their
dreams.
This finding is interesting because the increased frontal theta activity the
researchers observed looks just like the successful encoding and retrieval of
autobiographical memories seen while we are awake. That is, it is the same
electrical oscillations in the frontal cortex that make the recollection of
episodic memories (e.g., things that happened to you) possible. Thus, these
findings suggest that the neurophysiological mechanisms that we employ
while dreaming (and recalling dreams) are the same as when we construct
and retrieve memories while we are awake.
In another recent study conducted by the same research team, the authors
used the latest MRI techniques to investigate the relation between
dreaming and the role of deep-brain structures. In their study, the
researchers found that vivid, bizarre and emotionally intense dreams (the
dreams that people usually remember) are linked to parts of the amygdala
and hippocampus. While the amygdala plays a primary role in the
processing and memory of emotional reactions, the hippocampus has been
implicated in important memory functions, such as the consolidation of
information from short-term to long-term memory.
The proposed link between our dreams and emotions is also highlighted in
another recent study published by Matthew Walker and colleagues at the
Sleep and Neuroimaging Lab at UC Berkeley, who found that a reduction in
REM sleep (or less “dreaming”) influences our ability to understand
complex emotions in daily life – an essential feature of human social
functioning.  Scientists have also recently identified where dreaming is
likely to occur in the brain.  A very rare clinical condition known as
“Charcot-Wilbrand Syndrome” has been known to cause (among other
neurological symptoms) loss of the ability to dream.  However, it was not
until a few years ago that a patient reported to have lost her ability to dream
while having virtually no other permanent neurological symptoms. The
patient suffered a lesion in a part of the brain known as the right inferior
lingual gyrus (located in the visual cortex). Thus, we know that dreams are
generated in, or transmitted through this particular area of the brain, which
is associated with visual processing, emotion and visual memories.
Taken together, these recent findings tell an important story about the
underlying mechanism and possible purpose of dreaming.
Dreams seem to help us process emotions by encoding and constructing
memories of them. What we see and experience in our dreams might not
necessarily be real, but the emotions attached to these experiences certainly
are. Our dream stories essentially try to strip the emotion out of a certain
experience by creating a memory of it. This way, the emotion itself is no
longer active.  This mechanism fulfils an important role because when we
don’t process our emotions, especially negative ones, this increases
personal worry and anxiety. In fact, severe REM sleep-deprivation is
increasingly correlated to the development of mental disorders. In short,
dreams help regulate traffic on that fragile bridge which connects our
experiences with our emotions and memories.