The Lost Media Wiki’s article on the subject!
The Early SNES Version
The only known in-game screenshot of the game, N64 version.
Project Dream was a cancelled video game created by Rare, starting development on the SNES in the mid- 90s then moving to the Nintendo 64. Intended to be an ambitious RPG, this game went through many changes before the project morphed into an entirely different game, the platformer Banjo-Kazooie.
UPDATE! On 12/22/15, Rare released a video on their YouTube page entitled: "Rare Revealed: A Rare Look at Dream". The video shows, and tells of the development history of Dream, including some never before seen gameplay of the SNES version of Dream, The N64 Version of Dream, and a very early prototype of Banjo Kazooie. The video can be seen here: https://www.youtube.com/watch?v=w72kj20YNA0
Plot
Very little of the plot has ever been revealed. The game would have starred Edison, a boy with a wooden sword that would have gotten himself into trouble with a group of pirates led by Captain Blackeye, the game’s main antagonist. Other than that, not much else has ever surfaced, other than the cast of characters (see below).
SNES version (circa 1994-95)
Development first started on Project Dream in 1994-1995 (exact date unknown). The game would have used the same ACM (Advanced Computer Modeling) technique that was used for Donkey Kong Country in 1994. According to composer Grant Kirkhope, composer of the game (and the eventual Banjo-Kazooie), a demo had already been created when he joined on October 1995. He states that he was “blown away; it looked beautiful and was obviously going to be a big step up from Donkey Kong Country.”[…] The demo had a full introduction sequence and a full level.
Eventually, it was decided that the SNES was not powerful enough for the development team’s vision, so the project was switched over to the SNES’s successor, the N64.
N64 version (1996-97)
Development on the N64 version started on the N64 Disk Drive, in which the game would have switched to a 3D RPG game in the same vein as The Legend of Zelda: Ocarina of Time (which was also still in development at the time). This version would have had a unique 3D terrain system, created by stretching out the polygons. The processing power of the N64, however, was not enough to render these environments at a steady framerate.
Early design of the bear character, who would evolve into Banjo.
The development team had also taken notice of the second Rare team who was developing Twelve Tales: Conker 64 (a cutsey platformer inspired by Super Mario 64 that would later become the adult-orientated Conker’s Bad Fur Day). From that, the team decided to switch gears to a platformer with RPG elements. It was also noted that the main protagonist Edison was “too generic”, so the team looked for a new character, mainly woodland animals for inspiration. They eventually settled on a bear, who was initially a secondary character in the game, and he became the character Banjo.
In the end, the whole project was scrapped, and the team started over with some characters from Dream for a new game: Banjo-Kazooie.
Whereabouts of the Prototypes
Although it is unknown how complete either prototype was before both projects collapsed, their existence has been confirmed by those who worked on the game. To this day, however, neither has been seen, much less played, by anyone outside of Rare. The only real thing that has surfaced, other than concept art, is a lone in-game screenshot, which has Edison standing in a pre-rendered background. Fans are still holding hope that either prototype will surface someday to have a better idea as to what could have been.
Music
Also worth noting is the musical score, composed by Grant Kirkhope. According to him, he composed over 100 tracks for Dream. While most of them have not surfaced since the project’s cancellation, some songs are available on his website.
Resources
http://www.unseen64.net/2008/04/04/project-dream-banjo-kazooie-proto-beta/ -contains some info on the game
http://grantkirkhope.com/dream.html - a blog piece by Grant Kirkhope on his time on the game, contains music pieces from the game.
http://banjokazooie.wikia.com/wiki/Project_Dream - the Banjo-Kazooie’s wikia article for Project Dream, contains a character list.
https://www.youtube.com/watch?v=w72kj20YNA0 - Rare Revealed: A Rare Look at Dream.