Damn. The movie I always want to mention when this subject comes up does the dream sequence well, but for me to reveal the name of the movie spoils the movie by telling you that it’s a dream. So click only if you don’t mind spoiling a movie which you may or may not have seen:
Vanilla Sky. Much of the movie is a series of dreams, which are done really well. They work just like real dreams (or as close as a movie is apt to come). Characters change identities, the narrative becomes disjointed and skips around, all just as in real dreams. Cameron Crowe can do no wrong in my book, and I think he nails this one. (And yeah, I know it’s a remake.)