The book "The Interpretation of Dreams" (1900) represents the birth of the theory of Freudian dream analysis, which activity he described as "the royal road to the Unconscious".

Dreams are the disguised fulfilment of a repressed, infantile wish, expressed as a hallucinatory experience in the course of sleep.

As the child gets older the prohibition of infantile wishes becomes unconscious. Freud calls this function the 'censorship'.

Dreams have to be interpreted because their 'manifest content' is not the same as their hidden or 'latent content'.

Freud calls the system of transformations (condensation, displacement, representation, secondary revision) which articulates these two levels (manifest and latent contents) the 'dream-work', which is organized by processes of symbolization.

Condensation - a number of dream-elements (themes, images, figures, ideas etc) are combined into one, so that the dream becomes more compact than the dream-thoughts.

Displacement - a defense mechanism in which there is an unconscious shift of emotions, affect, or desires from the original object to a more acceptable or immediate substitute.

Representability - an object that is absent is made present in the form of an image. Latent and abstract thoughts are transformed into visual images.

Secondary revision - the act of putting into words, the translation of dream images into verbal images, and the transformation into narrative structure.

To interpret a dream Freud used the method of free association to uncover the latent content which is based on the primary processess, in contrast to the secondary processes of waking thought related to the manifest content. Dream interpretation is the reverse of 'dream work'.

There are two types of mental functioning: 1) the primary process is characteristic of unconscious mental activity (id) and is governed by the pleasure principle. It ignores the categories of space and time and presents toleration of contradictions; 2) the secondary process is characteristic of conscious thinking (ego) and is governed by the reality principle. It obeys the laws of formal logic.

Freud said of this work: "Insight such as this falls to one's lot but once in a lifetime."

More info about dreams:

The Interpretation of Dreams - wikipedia

Freud on dreams - Answers.com

The Interpretation of Dreams - London Museum

The Freud Abstracts - Volume IV

The Freud Abstracts - Volume V