It's about dreaming of things while asleep that we wish were real in life. True love, the love, the man she wishes to find.

'Funny how your feet
In dreams never touch the earth'

It's surreal. It's fantasy.

'I want to see you clearly
Come closer than this
But all I remember
Are the dreams in the mist'

He only exists within the dream. In the waking world, he can't be found.

'In a wood full of princes
Freedom is a kiss
But the prince hides his face
From dreams in the mist'

She thinks if she could only find him then she would feel happy, free, better, complete, fulfilled.

The song is simply about the heart's search and hope for love.

(And I agree, it's a classic, and a good one.)