I'm not sure what the dream means, but from a design perspective it's pretty cool - it's one of only 2 cutscenes where you have no control over progressing the text (all automated), which conveys the feeling that you've been knocked unconscious... The 2nd instance is just after Crono has died: the Fall of Zeal.
Also interesting is that after that dream sequence, and not before, the game begins showing you scenes that the characters couldn't possibly have witnessed (for example, Schala and Queen Zeal's interactions deep in the Ocean Palace). To a lesser degree, we're also shown things like a vision of Belthasar in Keeper's Dome, although we may never have visited there. Oh, and Lavos flying through space on his collision course. So, the dream marks a cool change in direction, and gives us a moment to let the reality sink in that Magus didn't create Lavos, and all that.
Ok... now that I've thought about it, maybe this "dream" is when Crono is momentarily awakened back to *real life,* and Chrono Trigger is the dream world, which he (we) quickly slips back into... haha. I feel like I may have read this idea before, somewhere =)