Nightmares are a prevalent parasomnia associated with a range of psychiatric conditions and pathological symptoms. Current knowledge about how nightmares are produced is still influenced by neo-psychoanalytic speculations as well as by more recent personality, evolutionary and neurobiological models. A majority of these models stipulate some type of emotionally adaptive function for dreaming, e.g., image contextualization, affect desomatization, mood regulation or fear extinction. Nightmares are widely seen to be either an intensified expression of an emotionally adaptive function or, conversely, as evidence of its breakdown. Our recent, affective network dysfunction (AND) model, integrates the tenets of many prior models in proposing that nightmares reflect problems with the fear extinction function of dreaming. This new model accounts for a wide range of dysphoric dream imagery (bad dreams, idiopathic nightmares, post-traumatic nightmares) and incorporates recent findings in the areas of brain imaging, sleep physiology, PTSD, anxiety disorders and the consolidation and extinction of fear memories.