When they become frightened, they retract their heads backward into themselves, causing that bulge that looks like the head of a snake. The snake "eyes" are just spots on the caterpillar's sides.
Yes, it's a caterpillar. There are several species of caterpillar that can make themselves look like snakes (although small ones). See all nine animal disguises in this post that contains NSFW text. Link -via Interesting Pile