This game is pretty old, but I figured I'd share it with you guys if you haven't had a chance to play it. Read more for download link.
In Yume Nikki (or “Dream Diary”), you play a young girl who can delve into a bizarre, and sometimes extremely frightening, dreamworld in order to collect “effects” that can alter her appearance in the dream. Some of the effects also have abilities that can be used there. At (almost) any time, our heroine can wake herself up and return to her small, spartan apartment, where she can write in her diary (save), or play a simple minigame on the television. (Wikipedia)
I played through this game sometime last year and really enjoyed it. The graphics aren't anything special (it was created with RPG Maker 2003), but it still managed to scare the hell out of me during those late night gaming sessions. And it has a nice creepy soundtrack to go with it. Also, it's pretty confusing, but if you get stuck there are guides all over the internet.