Just to fill in the beginning of the dream...
The dream opens in the Red Room. Cooper, 25 years older (the makeup is awful, he looks like he's covered in crepe paper), is sitting in a chair. The Little Man From Another Place is standing with his back to the room, shaking (but not dancing yet). SFX: buzzing electricity, a ceiling fan, a voice saying "Laura."
Slow motion shot of Sarah Palmer running down the stairs, ceiling fan visible behind her; this is recognizable as the scene in the pilot where she notices Laura is missing. Sarah's vision of Killer BOB at the foot of Laura's bed is briefly interpolated.
Really quick shots of the bloodied cloth in the train car, and the face of Laura's corpse.
The One-Armed Man appears. He speaks:
"Through the darkness of futures past
The magician longs to see
One chants out between two worlds
Fire, Walk With Me.
We lived among the people. I think you say... convenience store. We lived above it. I mean it like it is, and it sounds... I too have been touched by the devilish one -- a tattoo on the left shoulder. Oh, but when I saw the face of God, I was changed. I took the entire arm off. My name is Mike. His name is BOB."
We see BOB, standing as though sniffing the air, looking around for someone. He says, "Mike? Mike, can you hear me?" He looks now at the camera. "I'll catch you with my death bag. You may think I've gone insane. But I promise, I will kill again."
There is a quick shot of a circle of candles which are suddenly blown out; then the dream moves into the scene spydre describes above.
Incidentally, when Cooper wakes up, his normally overgelled hair is molded into an elaborate cowlick. This is a tribute to the mascot of Bob's Big Boy, where David Lynch spent an inordinate amount of time while working on the series. Killer BOB's name is a tribute to Bob's as well.
One last note: There is some dispute as to whether the line is "one chants out between two worlds" or "one chance out." Honestly, I don't know which serves the storyline better -- I wrote it as "chants" because that was what I originally thought I heard.