Rapid eye movement (REM) sleep and its main oscillatory feature, frontal theta, have been related to the processing of recent emotional memories. As memories constitute much of the source material for our dreams, we explored the link between REM frontal theta and the memory sources of dreaming, so as to elucidate the brain activities behind the formation of dream content. Twenty participants were woken for dream reports in REM and slow wave sleep (SWS) while monitored using electroencephalography. Eighteen participants reported at least one REM dream and 14 at least one SWS dream, and they, and independent judges, subsequently compared their dream reports with log records of their previous daily experiences. The number of references to recent waking-life experiences in REM dreams was positively correlated with frontal theta activity in the REM sleep period. No such correlation was observed for older memories, nor for SWS dreams. The emotional intensity of recent waking-life experiences incorporated into dreams was higher than the emotional intensity of experiences that were not incorporated. These results suggest that the formation of wakefulness-related dream content is associated with REM theta activity, and accords with theories that dreaming reflects emotional memory processing taking place in REM sleep.