There is very little known about the Nightmares, other than they earn their name. They are undead, soulless abominations that function by no known rules from any world that's Unified into the Multiverse so far. Their hosts are totally dead, their souls having moved on long ago - there is no saving Nightmares, nor negotiation, merely kill or be killed.
A disastrous war was fought against them by everyone in the local Multiverse, known as the Nightmare War, a century or so prior to "current" IC time. Due to the arrival of Oblivion it is now known that they are, likely, the remains of a previous, failed Multiverse.
Nightmares tend to be particularly good at sapping life energy; fighting in melee range is not recommended, although experienced melee fighters can usually still be quite effective. Nevertheless, non-specialists are better off using ranged combat.
The most dangerous part about the Nightmares is how few lower-level ones they are; they had to be extremely powerful or lucky in order to survive long enough to become Nightmares. As such it is very common to find Auric Nightmares, similar to Player Characters; whereas normal high-level Aurics tend to be on the order of one in a billion in the general population, Nightmares that are the equivalent of Aurics are at a higher ratio than 1 in 100, and may even be so close as to comprise 50% of their total population.
Nightmares came from the Volatile Wastelands and may reside there; however, it's likely they come and go to and from the previous Multiverse through rifts in time-space there.