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OK, so the subject believes it is being attacked by a creature out of its nightmares and makes a full attack against that creature each round, but where does this combat happen? Is it all in the creature's head? It is an Illusion (Phantasm) [Mind-Affecting], but the actual text says: "Each round the subject makes a full-attack action against the creature" not that it imagines it is doing so without actually burning any resources. So, as written, the subject takes real swings in the game world, or does it?
So at what "range" does the imagined combat occur? Is the target locked in melee? It doesn't say so. Does the caster need to specify which square the imagined foe occupies? It doesn't say that either. Would an archer see the creature at range and begin wasting real arrows shooting at it? Does an affected alchemist start lobbing bombs (with Fast Bombs and Rapid Shot that can be quite a few explosives as a full-attack, and with Precise Bombs he doesn't care if the target is only one square over) round after round? With the alchemist example, it makes a huge difference whether the combat is entirely imaginary (and he still has all his bombs when it is over because he only thought he was throwing them) or if he is blowing away bystanders (including the person who cast on him) because they are in the splash zone around his illusory opponent of no fixed position.