Sorry if someone already responded to this but I just wanted to give my take. I played Eternal Darkness way back in '02. I immediately fell in love with it. I didn't find it as terrifying as the REmake but I don't think it was really supposed to be. It was supposed to be creepy, fun and most of all interesting, and it was a massive success in all of those feats.
To your musing about a sequel-- there was in fact a sequel planned. There were actually two different occasions in which a reboot was initiated, but both fell apart for different reasons.
The story of Silicon Knights is long and ultimately tragic. It revolves around the founder, Denis Dyack, a guy whose personality and style ultimately led to the company's demise, but was ironically also one of the reasons why the game was so good.
He was ambitious and had visions of how he would want something to turn out, but had difficulty in constructing the path to get to that outcome. What I eventually learned is that one of the most unique and compelling ideas in this game, the sanity meter, wasn't even his own-- it was Miyamoto's. It was startling but the more one thinks about it the more it makes sense; their two best games, Eternal Darkness and Twin Snakes, were developed during a time when SK was a second-party developer for Nintendo and Denis was working directly with Miyamoto himself.
The biggest problem with SK was their obsession with the best hardware. Eternal Darkness was actually supposed to come out on the N64. I don't think that particular work's delay was SK's fault, but what I do know is that Dyack's greatest ambition, Too Human, was started and restarted many, many times. It went through many different iterations and not just in terms of engines, but in theme-- Too Human was originally about a Bladerunner kind of universe, and you were an android, leveling up different aspects of your various body parts. It was in development for the Playstation, N64 and the GameCube as well before it was finally released on the 360.
When Denis heard about the plans for the Wii, that was when he decided to pack up and take SK to Microsoft which would prove to be the beginning of his downfall. He became insulted and defensive when Too Human was received in lukewarm fashion at E3 (I can't remember which one it was), and got it in his head that it was because of the engine-- Unreal 3 by Epic. He sued epic and lost. Epic then countersued and won, because he had been taking code from the engine and using it in unauthorized manner.
That was basically it. The company did not have the funds to even begin to pay what was awarded to Epic.
If you look around you'll see that Denis started so many projects, but just wasn't able to focus. If memory serves he was actually taking people off of the Xmen game they made to start on the Too Human sequel when the Xmen game was in dire need of supplemental labor and attention. The tragedy is that he is actually quite creative. But he needs a directing force to channel that creative energy properly-- Like Miyamoto.
If he had stuck with them, he could have made his original vision for Too Human on the Wii, with both the creative and financial support to realize his vision. It's really too bad because the original idea seems so much more interesting than the Norse direction he decided to take it after he went to MS.
Playstation Alpha
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GameCube
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Edit: The proposed sequel to Eternal Darkness was called Shadow of The Eternals
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