I love dream sequences in film. There is often a really interesting marriage of live action and animation, sometimes even with puppets. Here are a few of my favorites:
Scottie's (Jimmie Stewart) post-traumatic stress/vertigo dream from Alfred Hitchcock's "Vertigo."
John's (Gregory Peck) anxious dream designed by Salvator Dali from Hitchcock's "Spellbound."
Spellbound: John's Dream Sequence (for whatever reason the clip turns into something else about halfway through)
This is what happens when Walt Disney and Salvator Dali collaborate. It's called "Destino."
Saw this for the first time at the Dali "Dali: Painting and Film" exhibit at the MoMA in NYC in summer of 2008. Here is the past event page for the exhibit: Dali: Painting and Film 2008. It was by far my favorite part of the exhibit.
Andrea's post-surgery/waking up dream from Tarsem Singh's "The Fall."
Stephane's dream from Michel Gondry's "The Science of Sleep."
Drunken "Pink Elephants on Parade" scene from Disney's "Dumbo."