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During the day time, we are conscious of our surroundings and the brain does its work.

During sleep, we are not conscious. We have dreams. But the brain continues to function. After we awake though, there is only a memory of the dream experience. Is it possible to observe our dreams - that is, can we observe dreams as they occur and be conscious that we are dreaming?

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I am also interested if there is some work in neuroscience or cognitive psy in exploration of lucid dreams. – ICanFeelIt Jun 19 '13 at 13:34
As user1406647 mentions, the topic of Lucid Dreaming is related. – BenCole Jun 19 '13 at 13:41

Lucid dreaming is a practice in buddhism. La Berge (1980) describes in some detail how he learned to dream lucidly, and several authors managed to induce lucid dreams in their test subjects through electrostimulation, food supplements and other means. There are some popular books that claim to teach the skill, some of them written by La Berge.

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During REM sleep (during which dreams seem to occur), we experience muscular atonia – our muscle can’t move. When the region responsible for muscular atonia is impaired, patients seem to live through their dreams. It has been studied in cats by Michel Jouvet.

I believe that this shows that it is reasonable to trust our subjective experience here : we are conscious of the dream while we have it – although, when we recall it later, it’s probably very much reconstructed. The relation between temporality and consicousness will remain a very tricky question, and it may actually be impossible to differentiate "being conscious as it occurs" and "having a memory of the dream experience". You can find an extensive discussion on the relation between temporality and consciousness in Daniel Dennett’s book Consciousness explained , chapter 6 - Time and Experience. (And there is probably more in his more recent book, Sweet dreams but I haven’t read it).

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My answer to the question is yes. I have personally experimented (not voluntarily) conscious dreams a few years ago.To be more precise, I was conscious in dreams but also conscious to dream.

Of course this answer is a testimony, not a scientific proof, of the existence of conscious dream.
But maybe in cognitive science, many serious testimonies constitute a proof.

Let me add an interesting remark and a question:

As I said, the processes of consciousness and dream seem to coexist, but as water and oil, they tend to separate quickly:

In my experiments, when the process of consciousness started in a dream, then the dream becomes increasingly blurred and awakening occurs rapidly.
I remember to have consciously walked and explored my dreams worlds for a few minutes or quarter of an hour (to be more precise, it seemed to have had this time), but not more ...

Is there a cognitive explanation for this quick separation ?

To make a nod to the Indian philosophy (@SaiKrishna):
Consciousness is light and dream is shadow.
When the light encounters the shadow, the shadow disappears...

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