This is as close to a nightmare effect as i could get. It's...very dark, and thats usually how most nightmares turn out, one way or another.
1. Take Your Picture
2. Duplicate it three Times (Layer > Duplicate Layer)
3. Set the Top Layer's Blending Mode to "Hard Light"

4. Set The Layer Below that to "Soft Light"

5. And Set The Layer Below That to "Hard Light"

6. Now select your top layer, and go "Image > Brightness/Contrast" and use these settings
Brightness: -100
Contrast : +15

7. Now Duplicate the Bottom Layer, and bring it to the top of the layers palette. And Set the Blending Mode to "Hard Light"
8. Now Go, "Filter > Texture > Grain" (Intensity : 37 | Contrast : 0 | Grain Type: Horizontal)

9 Now Select the Top Layer of your layers palette. and go "Filter > Artistic > Smudge Stick" and use these settings:
Stroke Length: 10
Highlight Area: 0
Intensite : 10

10. Now, once again, duplicate the bottom layer (layer > Duplicate Layer) and bring it to the top of the layers palette.
11. Now on the top layer (should be your regular picture) turn the blending mode to "Vivid Light" and go
"Filter > Blur > Motion Blur" (Angle : 16 | Distance : 100 Pixels)

12. Make a New Layer. (Layer > New Layer)
13. "Filter > Render > Clouds" then go, "Filter > Render > Difference Clouds"
14. Now Drop the opacity of the cloud layer down to 45.

15. Now we're going to add beady eyes, to the dark spot. Now mine has a very dark spot, down the path. So, its a nice place to add a few sets of eyes. To make the eyes, simply follow the steps below.
16. New Layer (Layer > New Layer). Now grab your paint brush tool, and using a semi-small brush (between 2 and 12 depending on the picture size) make several sets of eyes, by dotting the brush tool. so it should look something like this:
17. now go into your layer styles for that layer. and select "Outer Glow" and use these settings:

and this should be your final result!

Yes, i know i know, it isnt the best, but i still think it looks pretty nice.
-Scott