I would think about adding these sanity penaltys in the oblivion realms, too. Think about it, a scorching hot environment with hostile monsters and corpses dripping blood and whatnot? Insane-o-matic if I ever saw one. The unbearable heat does things to yer' brain, ya see... *swirls finger beside head*
Have you thought of an effect where 'something' follows the player at a good distance so the player can only catch glimpses of it, and when the player runs towards it, it dissapears?