This paper is an evaluation of the hypothesis that REM sleep and dreaming serve a mood regulatory function, in particular, that they desensitize affect. There is presently experimental evidence that daytime mood influences REM sleep and dreaming and that the latter, in turn, influence daytime mood. It is suggested that these interrelationships may be better understood using a modified behavioral perspective on dreaming. Specifically, it is proposed that anxious dream imagery may be desensitized during REM sleep by a process that is analogous to systematic desensitization therapy. This analogy attributes functional roles to both psychological (dreaming) and physiological (atonia) aspects of REM sleep. Abnormal REM sleep phenomena such as narcolepsy, REM sleep behavior disorder, and nightmares are evaluated from the behavioral-desensitization point of view, and the implications for future research on REM sleep, dreaming, and waking mood are discussed.