2. Not Seeing is Believing
Too often in horror, we are treated to the true face of evil. The Antagonist that represents all our nightmares and horrifying experiences. The effect is two-fold; while you immediately display terror and a mix of emotions, you show the player what to expect. This isn’t necessarily a bad thing; it's just used with too much liberty in video games. How many times do I have to kill the annoying enemy that scared me from the first hour? By the end of the game, I’m just annoyed and frustrated at the monster, rather than feel tense and frightened. Use a little more tact and show players that the idea that the monster you created is a lot more terrifying than the actual creature.
1. Be Scary
How’s that for being redundant? When all else fails at the end, just remember that being a sadistic turdball works too. Give the player connections, ties through character development and interaction. Then show the player what you do best — being scary. Prey on them. Show them the deep psychological aspects of the human mind. Shatter their expectations of what is real and not real. So deeply ingrained to the point where they fear the myopic details of their lives. Show them why people are afraid of the dark.
These suggestions are far from complete, or for that matter well reasoned. However, I still have hope for a truly scary video game to come along. Hopefully Alan Wake fills that niche. Yes that was a shameless plug; hooray for being professional.