Roy Orbison claimed in interviews that the lyrics for this song came to him in a dream; he wrote the music once he woke up. Typical of many Orbison songs, it's a heartbreaker: asleep at night is the only time he can be with the one he loves, as when he wakes up, she's gone.
This song is featured in a key scene in the 1986 film Blue Velvet where Dean Stockwell's character lip-synchs to the song. Orbison initially rejected director David Lynch's request to use this song, but later made a video for the track with scenes from the film.
The use of this song in Blue Velvet sparked a career resurgence for Orbison. Because of legal entanglements, he didn't have access to the master recordings of many of his hits, so after the movie drummed up interest in his work, he set about re-recording his songs for a compilation called In Dreams: The Greatest Hits. When Orbison asked Lynch if he could use footage of the film in a video for the re-recorded "In Dreams," Lynch not only agreed, but offered to help with the song. With T Bone Burnett producing, Lynch directed Orbison in his performance as he would an actor in a film, and it worked, allowing Orbison to be faithful to the original recording by doing it with no overdubs.
Shortly before he died, Roy Orbison recorded a follow-up to this song called "In The Real World" on his 1989 album Mystery Girl.