Usually right after waking up, in a state of about 10% consciousness, when one's imagination creates a fantasy that is more normal than regular dreams, but more odd than regular thoughts or imaginations.
Scott: Dude, i just had a half dream where I had a threesome with 2 chicks.
Steve: What makes that a half dream?
Scott: Well, i was barely awake, and I'm gay.
Steve: Oh yeah, forgot about that.