In this paper, I discuss the relationship between bodily experiences in dreams and the sleeping, physical body. I question the popular view that dreaming is a naturally and frequently occurring real-world example of cranial envatment. This view states that dreams are functionally disembodied states: in a majority of dreams, phenomenal experience, including the phenomenology of embodied selfhood, unfolds completely independently of external and peripheral stimuli and outward movement. I advance an alternative and more empirically plausible view of dreams as weakly phenomenally-functionally embodied states. The view predicts that bodily experiences in dreams can be placed on a continuum with bodily illusions in wakefulness. It also acknowledges that there is a high degree of variation across dreams and different sleep stages in the degree of causal coupling between dream imagery, sensory input, and outward motor activity. Furthermore, I use the example of movement sensations in dreams and their relation to outward muscular activity to develop a predictive processing account. I propose that movement sensations in dreams are associated with a basic and developmentally early kind of bodily self-sampling. This account, which affords a central role to active inference, can then be broadened to explain other aspects of self- and world-simulation in dreams. Dreams are world-simulations centered on the self, and important aspects of both self- and world-simulation in dreams are closely linked to bodily self-sampling, including muscular activity, illusory own-body perception, and vestibular orienting in sleep. This is consistent with cognitive accounts of dream generation, in which long-term beliefs and expectations, as well as waking concerns and memories play an important role. What I add to this picture is an emphasis on the real-body basis of dream imagery. This offers a novel perspective on the formation of dream imagery and suggests new lines of research.