Dreaming is a complex, multimodal and sequentially organized model of the waking world (Metzinger, 2003). Nightmares are a category of dreams involving threatening scenarios, anxiety and other negative emotions (Hartmann, 1998; Nielsen & Levin, 2007). Dreams and nightmares are explored in this present thesis in the light of psychology and modern cognitive neuroscience as to their nature, function and neural correlates. The three main dream theories and their leading investigations are reviewed to evaluate their evidence and overall explanatory power to account for the function of dreams and nightmares. Random Activation Theories (RATs) claim dreams are biological epiphenomena and by-products of sleep underlying mechanisms (Crick & Mitchison, 1983; Flanagan, 1995, 2000a, 2000b, Hobson & McCarley, 1997). Mood regulation theories consider that the psychological function of dreams is to regulate mood and help with the adaptation of individuals to their current environment such as solving daily concerns and recovery after trauma exposure (Hartmann, 1996; Levin, 1998; Stickgold, 2008; Kramer, 1991a, 1991b, 2014). Threat Simulation Theories of dreams present the evolutionary function for dreaming as a simulating off-line model of the world used to rehearse threatening events encountered in the human ancestral environment (Revonsuo, 2000a). With the threat-simulation system, threats were likely to be recognized and avoidance skills developed to guarantee reproductive success. TST consider nightmares to reflect the threat-simulation system fully activated (Revonsuo, 2000a). Supported by a robust body of evidence TST is concluded to be the most plausible theory at the moment to account as a theoretical explanation of dreams and nightmares