Dreamtime was a weird dream Ratchet suffered after smoking too much cryosleep. In his dream strange things happened. Bats would often attack him, they multiplied when shattering a mirror. Random Qwarks appeared throwing swords at him and even Clank and Klunk confronted him in Dreamtime. Eventually Clank woke Ratchet up after the showdown between them in his dream.

Ratchet & Clank wiki
For those without comedic tastes, the so-called experts at the Ratchet & Clank wiki have an article about Dreamtime.