Donnie is experiencing what is commonly called a daylight hallucination.
6 seconds sound clip from the Donnie Darko movie soundboard.
You can hear this line at 01:03:44 in the Blu-ray version of the movie.
Quote context
[...]
- I'm not really sure that's a good example. I think he had just cause to insult her.
- Let me just lay out what I believe is happening here.
- Has he ever told you about his friend Frank?
- Frank?
- Yes, the giant bunny rabbit.
- I don't recall him ever having mentioned a rabbit.
- Donnie is experiencing what is commonly called a daylight hallucination.
- This is a common occurrence among paranoid schizophrenics.
- I would like to, um, do more hypnotherapy and increase his medication.
- Whatever will help him, really, because that's why we're here.
[...]