I do not know enough about the brain and sleeping to make an accurate statement about this. I know that when I fall asleep with my headphones on I sometimes dream in the target language. The only problem is I only had the feeling of fluency in my dreams. When I wake up the next morning I am no more further along in my studies then the night before. So it is possible that information was retained but not in a way that is useful in a conscious state. Thanks for asking this question as I am now interested in this subject. I definitely want to revisit this question when I am more knowledgeable about psychology.

Haha i've tried it before too but nothing happened either, thinks it's a myth, yet the whole dream thing is very much true, Maybe theres more to it :D Thanks for commenting

Lol, I have tried this with French and Italian, but I wasn't successful.

Yes I have attempted this many times. I can't say that it has made an impact on my ability to speak Mandarin although I have been having dreams in Mandarin more lately.