Frequent nightmares have a high prevalence and constitute a risk factor for psychiatric conditions, but their pathophysiology is poorly understood. Our aim was to examine sleep architecture and electroencephalographic markers-with a specific focus on state transitions-related to sleep regulation and hyperarousal in participants with frequent nightmares (NM participants) versus healthy controls. Healthy controls and NM participants spent two consecutive nights in the sleep laboratory. Second night spectral power during NREM to REM sleep (pre-REM) and REM to NREM (post-REM) transitions as well as during NREM and REM periods were evaluated for 22 NM participants compared to 22 healthy controls with a similar distribution of age, gender, and dream recall frequency. We found significant differences between the groups in the pre-REM to post-REM changes in low- and high-frequency domains. NM participants experienced a lower amount of slow-wave sleep and showed increased beta and gamma power during NREM and pre-REM periods. No difference was present during REM and post-REM phases. Furthermore, while increased pre-REM high-frequency power seems to be mainly driven by post-traumatic stress disorder (PTSD) symptom intensity, decreased low-frequency activity occurred regardless of PTSD symptom severity. Our findings indicate that NM participants had increased high-frequency spectral power during NREM and pre-REM periods, as well as relatively reduced slow frequency and increased fast frequency spectral power across pre-and post-REM periods. This combination of reduced sleep-protective activity and increased hyperarousal suggests an imbalance between sleep regulatory and wake-promoting systems in NM participants.