Do the servants in Amnesia actually look like that or is it Daniel's sanity?

[Urzaran]

I think they really look like that, when you read about Wilhelm and his men it talks about how they appear to be changing after drinking the wine. And for the servants sulking I just assumed that's all Daniel could see was the outline of them where they appear to be sulking, due to the fact that it was kept dark in the castle.

I might be wrong about this, but I was under the impression that they died of poisoning, and the changing (I assumed) to be metaphorical for pain/etc from the poisoned wine. I think that the servants could or could not be monsters, since sane Daniel mentioned finding them creepy (supporting hallucinations), but Alexander referred to 'making' more servants as well (monsters).

One of Alexander's notes mentions his fear of Wilhelm betraying and that his servants were being killed, and says by feeding them wine it would solve both his problems. Killing them wouldn't have gotten him more servants, but changing them into monsters that he controls would solve both problems.

I think he's referring to the king's men as part of the problem, and that giving Wilhelm and his men poisoned wine and killing them would solve both problems, since there would be no way the men would speak of what had transpired within the castle walls. Plus, you see them all scattered in pieces within the room, so there would be no identifiable corpses, should the king's men want to search within. In addition, the flashback had a part where it indeed sounded like one of the men bursting and scattering his innards all over the floor.

However, given the circumstances, it could entirely be possible that Wilhelm and his men were indeed those monstrosities that pursued you throughout the course of the game. There wasn't an entirely clear explanation of what these things were, just bits and pieces from several different sources, much of it adding to little more than hearsay. The fact that the monsters/servants were unexplained added to the mystery; and as we all know, fear is in the unknown.