Shortly after being formed, Dream's former manager, Judith Fontaine, signed them to Clockwork Entertainment so they could begin working on their debut album. There, they recorded several tracks for the album. Subsequently, Dream parted ways with Fontaine and Clockwork Entertainment. Shortly thereafter, the group signed a record deal with Bad Boy Records. This meant that much of what was recorded at Clockwork Entertainment would be excluded from the album. In January 1999, original member Alex Chester left the group and was replaced by Diana Ortiz. With Ortiz on board, Dream recorded It Was All a Dream from 1999 to 2000.
Initial pressings of the CD feature a darked cover, making the background look brown as well as the picture and text being harder to see, and a misprint on the track listing. The song "Mr. Telephone Man" is listed as simply "Mr. Telephone." Both of these were fixed on subsequent pressings, with the new color being the same image and text, but brightened. Here, the cover's background looks red.
It Was All a Dream received mixed reviews from music critics. Arion Berger of Rolling Stone commended the girl group for delivering an album that contains a charm that's both fierce and adorable, concluding that it "sounds good, and, if you're under eighteen, very good for you, too."David Browne, writing for Entertainment Weekly, was lukewarm on the album, praising the first couple of tracks and the girls' competent vocal delivery but criticized the rest of the album's overlong, generic teen pop content and sounding similar to other girl groups.AllMusic's Stephen Thomas Erlewine gave a mixed review to the album, praising the good-sounding production and decent vocal performances but felt that it overstayed its running time and made the girls feel like non-entities on their own album, concluding that "what separates the good from the great is personality, which is lacking on the otherwise adequate It Was All a Dream." A writer for People found the album's adult content off-putting due to the band members' ages and preferred the tracks "Mr. Telephone Man" and "How Long" for being more age-appropriate for the girl group.
It Was All a Dream was released on January 23, 2001. It spent 20 weeks on the Billboard 200, peaking at number 6. The album sold 1.5 million copies in the U.S. and was certified gold by the RIAA on February 21, 2001, then platinum on March 5, 2001.
In order to promote the album, two singles were released: "He Loves U Not" and "This is Me". "He Loves U Not" was released on September 12, 2000 and was a transatlantic hit, peaking at number 2 on the Billboard Hot 100, number 15 on the Hot R&B/Hip-Hop Singles & Tracks, number 17 on the UK Singles Chart and number 35 on the ARIA Singles Chart. "This is Me" was released on May 1, 2001 and although it wasn't as successful as "He Loves U Not", it did peak at number 39 on the Billboard Hot 100 and number 80 on the Hot R&B/Hip-Hop Singles & Tracks. "Miss You" and "In My Dreams" were supposed to be released as the album's third and fourth singles, but due to the September 11 attacks, plans for their release were cancelled.
"Pain" contains a sample of "Crazy" by The Usual Suspects.
Two other versions of the album were released: one version included two bonus tracks, "Baby" and "Back 2 U", released as tracks 18 and 19 with the same original track listing; the second version included three bonus tracks, "Baby", "Back 2 U", and "Daddy's Little Girl" (which features original member Alex Chester) and omitted "In My Dreams", "I Don't Like Anyone", "This Is Me", and "He Loves U Not (Remix)".
It Was All a Dream peaked at #6 on the Billboard 200 albums chart on February 10, 2001.