The Dreamlands are a fantastic realm that is loosely connected to the mortal plane. (At one time, they were also connected to the First Hell and the First Heaven through a structure called the Axis, but Merai Starchild destroyed those connections during the Great Fall.) The mortal plane of MK2K is what you might call a "moderate fantasy" world -- most sentients are humans, with a few other races here and there, and magic is a fairly disciplined, mostly sensible thing. The Dreamlands, in contrast, are fantasy gone berserk. Every kind of chimera and fantasy folk imaginable are present there, and normal humans only appear as occasional visitors. Just about anything that has ever been witnessed in man's most outlandish dreams -- and most horrifying nightmares -- is present in some part of the Dreamlands. Anything can happen there -- and with magic as powerful, abundant, and chaotic as it is, "anything" does happen with astounding regularity. Since Merai cast the hosts of heaven and hell into the Dreamlands, they have become the battleground for a Great War between these two supernatural armies.
The Dreamlands are so-named because the minds of human beings travel to their outskirts while asleep, and those who have the skill for it can learn to project their consciousness around within them. Most humans have some level of latent talent for this lucid dreaming, and a normal person's consciousness will often brush quite close to the edges of this realm every night. When someone is in this state, people and creatures in the Dreamlands (including visiting humans) can influence the formation of their dreams, even entering those dreams to speak to the person directly. Whether the person remembers this upon waking is, of course, largely unpredictable. Technomagical software is currently being developed in some parts of the world to make lucid dreaming easily accessible to everyone, though Nocturna and her allies are working hard to prevent it from going to market, for fear that it could weaken the barriers between the Dreamlands and the waking world.
The Dreamlands plane is of infinite size, and its entire landscape is subject to variable geometry. It takes a lot of practice and discipline to be able to navigate successfully in this realm. There are plenty of dangerous, nightmarish creatures in this realm -- particularly underground -- and while a lucid dreamer may not die from having his dream-form attacked by dimensional shambler, it's safe to say that it isn't a healthy thing. Inexperienced lucid dreamers are strongly advised to travel with a guide.
In addition to lucid dreaming, it is possible to use magic to travel physically to the Dreamlands. This is most often done as a means of rapid travel, since the variable geometry of the plane means that two points that are far apart on the Material Plane may be joined to points that are much closer together in the Dreamlands. There are also certain cities in the Dreamlands where items that are impossible to find on Earth can be readily obtained -- for the right price. The spells that allow deliberate, physical travel to and from the Dreamlands are carefully guarded; Nocturna and her Dream Walkers know them, as does Rickkter, but even a high master wizard would have difficulty finding the necessary rituals.
There are, however, occasional "leaks" between the Dreamlands and the Material Plane, intra-dimensional portals which pop up from time to time. Nobody can quite predict when and where they will occur, but they seem to gravitate towards high-mana regions (such as Metamor City). When one of these portals opens, any being can pass from one side to the other freely. The amount of time they remain open is also unpredictable, so sometimes people and creatures will get stuck on the "wrong" side of the door. This is the explanation for the occasional sightings of monstrous creatures and fantastic fairy-folk in different parts of the world. Nagas, Sidhe, centaurs, and many other fantastic creatures first came into existence in the Dreamlands ... possibly because some mortal simply dreamed them into being.