I've had something similar happen, where I had a very mundane dream where I had woken up, talked to my mom, brushed my teeth, gone through my morning routine. Suddenly, my alarm clock woke me up and I realized I had just dreamed all of that.
I couldn't imagine dreaming about being awake trying to sleep. It must have been frustrating, but I feel there is a Xzibit joke in there somewhere.
I don't think it was sleep paralysis though. I've experienced that once in my life, and even though I wasn't hallucinating, it was still terrifying. OP didn't make mention of any panic, just confusion, so I think he was just dreaming.