He is under a bridge trying to grab the kids
I was terrifed of this image -- never forgot it -- and have never seen it since

which ep?
the French whisker one ?

It was the episode called "A Matter of Choice" from Season 3.

Apparently, Uncle Bill thought that the violence on television was not good for Buffy and Jody (the stuff they were doing was harmless, come on!) ,so he institutes fairy tales for them to read. then they have nightmares after reading them, surprise surprise. They didn't have nightmares or any deformities when they were watching the army and cowboy shows. They apparently DIDN'T have a choice.

That made me want to skip this episode on the DVD.