Oh no, it wasn't a dream. They explain what the Flesh in the first episode. It's a clone of the person, with all the thoughts, memories, personalities, etc. of the original person. As they showed in both episodes, they are just as real as the original people. Amy was kidnapped at some point in the past, and her actual self was replaced with this Flesh Amy, while the real one is in this pod thing, about to have a baby. All is explained further in the next episode.