The sleep process is greatly effected by changes in the mood state of the dreamer as sleep begins and dreams trend to act like an emotional mediator. When REM sleep sets in, there is an emotional surge that accompanies it, this surge is received by the our dream experience. Another thought about the nature of nightmares is that when our psychological capacity to associate a dream experience occurs, the emotional sensitivity of our mood at this time disrupts our minds ability to stay dreaming.
During our dreams we constantly are making connections between recently experienced input and past memories and experience. In this making of connections, a net like model is constructed. Much like a spider web these cross coneection grow and strengthen each other, changing all the time; reaching out to the furthest and deepest regions of the brain. What is happening is the brain is contextualizing different thoughts and emotions and according to some reasearches serves not only to create a context for our dream experiences, but also to spread out and reduce the "shock" that accompanies the computation energy of our dream function. One such dream expert called it a sort of "calming of a storm", in other words lessening the surge of activity by weaving and extending the flow of "experience" through out the brain. The reason for this is to reduce the disturbance of the emotional energy surge that coincides with the onset of REM sleep.