There are dreams that are more than hallucinations. If you grow up in one city for many years, you can be barraged by many different kinds of stimuli from that city, without unsettling you in the least. But if you move to a city far away, where the customs are strange, and the people act differently, being bombarded by the stimuli from that city can alter your sense of self, affect sensory perception, create fear and change the view of the world significantly.
The dreams that are more than hallucinations are like that change, a shift in consciousness that comes from the types of experiences that are the hallmarks of such heightened state experiences. The result is something unexpected and unusual, something foreign and strange. The unreal becomes very real, and that is the difference of an altered state, even without using any mind-bending drugs.