There are many ways to interpret Frankenstein's dream. One way is to understand it as a kind of foreshadowing, not just of Elizabeth's death, but of how the creature will persecute Frankenstein for the rest of the novel. Another way to think about the dream is that it suggests the essential unnaturalness of Frankenstein's creation, and Frankenstein's identity as its "mother." The confusion in the dream, which begins with a sexual image (Frankenstein kissing Elizabeth on the lips) but ends with Elizabeth, in the act of the kiss, transforming into the corpse of Frankenstein's mother, suggests that Frankenstein's work undermines not simply his relationship with his fiance, but also what it means to be "male" or "female." It has been remarked that Frankenstein is a book about what happens when a man decides to have a child without a woman, and I think the dream, in which desire (for Elizabeth, or for knowledge) is transformed into death and decay, is a graphic representation of how the monster's creation undermines or betrays "normal" family relations.
When Frankenstein wakes up, it is as if the dream continues. The monster is there, looking at him. The monster's smile is another kind of perversion, like the smile of an infant made grotesque. Frankenstein is horrified, and flees; it is like he is a mother who is abandoning their child. Had Frankenstein been able to love his creation, how much horror could have been avoided?