Hehe not the first time I've been told I have balls of steel
I think the atmosphere in the game is great, it was really creepy and those monsters were nicely detailed, though I have to say, I guess i can understand Daniel loosing sanity from looking at them, but it is a bit of a shame, you have these nicely designed monsters and the game punishes you from looking at them. I think they should have majorly toned down the sanity loss from it, at least in respect of the Art Department.
But all in all, once you realize Monsters only appear mostly when you do something major, you should be ready for them, and that makes it less daunting.
However, I do still miss the lack of weapons, whenever i see those monsters I keep thinking a good whack with a chair or a swing of a sword will put them down, so why must Daniel run?
On a side note, there has only been 1 game to ever almost really scare me, and thats this Japanese game called Siren. Look it up on you tube, that game is really hardcore.