I ran a similar 3.5 campaign recently.
There was a "real world" where the main quest was to take place, but to defeat the main BBEG, the players had to quest through a magic portal (think Stargate, but magic instead of Alien Tech). The portal would lead them to other worlds where they had to quest for some powerful magic items to help them defeat the BBEG in the main quest-line.
In the other worlds they encountered: Ulysses (The Odyssey), Robin Hood, Alice in Wonderland, Clint Eastwood (from a Western), Darth Maul and many more characters from Movies and TV shows. Each world was separate and isolated but allowed me to explore different story ideas.
Before I wrote the story for each world, I'd watch the movie(s) for that world (Yeah Netflix!). And then I'd modify the world so that the players wouldn't know what to expect. For example, Robin Hood was an evil thief who reveled in murder and violence. I changed the evil witch into a beautiful and good sorceress. The PCs accidentally offender her ended up fighting/defeating her, but this just added to the intrigue as they had to grip with the moral implications (and how to cover up their mistake).
I pulled elements from the Disney version, Men in Tights, the version with Uma Thurman and the version with Kevin Costner (Robin Hoods on Wikipedia).
I used leveled humanoids for most of my encounters. This allowed me to dynamically adjust the CR as the PCs leveled up (and adjust for any powergaming or new players). e.g. Robin Hood was a ranger & Friar Tuck was a cleric. The Cheshire cat was a Dire lion with Greater Invisibility at will. You probably want to get Herolab or PCGen to help with this sort of thing - I was doing it by hand which was slow as mud.
The more modern worlds (Old West and Star Wars) presented a greater challenge, but I used the 3.5 DMG rules on guns and laser pistols and still incorporated magic and monsters.
It sounds like you have a good start. Though, Sleeping Beauty alone may not be enough story line for more than 1 or 2 levels. So you then have to decide whether to merge multiple fairy tales into one world, or to isolate them somehow. Or expand the core storyline of Sleeping Beauty into a much bigger world.
Sleeping beauty's dreams may allow you to isolate each fairy tale by having the PCs physically enter those dreams. They might have to defeat the demons in her nightmares to help her awaken. Perhaps she is dreaming the story of Cinderella, Snowwhite and many more. Perhaps Cinderella's evil step-sisters are level appropriate evil wizards (can't be sorcerers with that terrible charisma).
Dream powers sounds like a cool idea - I like it. However, creating your own magic system can be very time intensive and difficult to keep it balanced. I recommend keeping it storyline only. For example, have a "cut scene" with dream powers being used, but I wouldn't recommend using it in combat against the PCs (or allowing them to make use of it). If you absolutely must use it in combat, have it only be able to simulate spells of appropriate CR from core (like an alternate form of magic).
Just my thoughts. It sounds like you'll have a fun campaign regardless.
