The story-like organization of dreams is characterized by a pervasive bizarreness of events and actions that resembles psychotic thought, and largely exceeds that observed in normal waking fantasies. Little is known about the neural correlates of the confabulatory narrative construction of dreams. In this study, dreams, fantasies elicited by ambiguous pictorial stimuli, and non-imaginative first- and third-person narratives from healthy participants were recorded, and were then studied for brain blood oxygen level-dependent functional magnetic resonance imaging on a 3.0-Tesla scanner while listening to their own narrative reports and attempting a retrieval of the corresponding experience. In respect to non-bizarre reports of daytime activities, the script-driven recall of dreams and fantasies differentially activated a right hemisphere network including areas in the inferior frontal gyrus, and superior and middle temporal gyrus. Neural responses were significantly greater for fantasies than for dreams in all regions, and inversely proportional to the degree of bizarreness observed in narrative reports. The inferior frontal gyrus, superior and middle temporal gyrus have been implicated in the semantic activation, integration and selection needed to build a coherent story representation and to resolve semantic ambiguities; in deductive and inferential reasoning; in self- and other-perspective taking, theory of mind, moral and autobiographical reasoning. Their degree of activation could parallel the level of logical robustness or inconsistency experienced when integrating information and mental representations in the process of building fantasy and dream narratives.