Mike is not crazyThe Ancients knew that all librarians were helpful to Mike, and thus ordered Rita killed since she was a librarian. So, why did Mike blank out and have Laser-Guided Amnesia? Either this is a side-effect of formerly having the embryo in his head, or Jack simply knocked him out before killing Rita.
Jack grew from the embryoBecause the embryo was planted in Mike, it has a special connection to him. It is possible that the pills that were supposed to destroy the embryo instead merely banished it, and it was able to grow afterwards.
Mike is crazyThe events of the first game were actually Mike having a stroke or some other mental problem, possibly caused by his new house. The house may have also simply been full of hallucinogenic mold/fungi. The reason why the librarian felt compelled to give Mike the pills was because she noticed him looking like he badly needed them as he wandered around town. This requires an explanation of why Jack would continue to talk about the Ancients after Mike has perished. Well, dying from stabbing can actually take a while depending on where the stabbing happens, so Mike may simply be having a Dying Dream of Jack saying those things and riding off.
Mike is crazy and the Dark World, Behemoth, Jack, etc. are realThe Keeper really was the Shapeshifter all along, and Mike was only hallucinating that she had a connection with the librarian. In reality, Mike has always been evil and therefore his dark world counterpart will be likewise. Alternatively, because Mike has multiple personality disorder, he may have multiple dark world selves, of which Jack is one. Alternatively alternatively, Mike does have multiple personalities, which is why his Dark World counterpart is the Shapeshifter, who has multiple appearances.
Everything after the first meeting with the therapist in the second game is a dreamExcept maybe for Mike Dawson's fate. I mean, many of the events of the late game seem unrealistic. The strong man actually liking Mike? That's a big clue right there.
Mike didn't kill Rita but the Dark World, Behemoth, etc. are not realJack is just a guy who is really good at sneaking.
The events of the first game are real, but in the sequel, Mike's crazyWhile Mike extracted the embryo, its insertion still left permanent brain damage. That, combined with the massive trauma of the events of the first game would be an excellent recipe for crazy. This also explains the huge shift in characterization between games.
Mike Dawson didn't really die at the end.Depending on how well the player does, he's very likely to still have a few "extra lives" at the end. Surely he can redeem them in whatever our world's afterlife is like, too...
Mike in Darkseed 2 is a white aged-up Shinji Ikari.Hated by nearly everybody? Check. Has only one friend that turns out not to be? Check. Poor relationship with parental figure? Check. Whiny, annoying, and wimpy? Check. Both protagonists in a piece of Mind Screw? Check. He's pretty much Shinji as a white guy.
Mike Dawson is the player character from Ambition.After the events of Dark Seed II, Mike wanted to become a detective. He couldn't, because everyone in the town was either dead or hated him. So, he faked his death and fled to Canada under an assumed name (which we never learn) to become one. It would explain why the protagonist in that game appears to exhibit Dawson-like competence and charisma, and why (s)he wastes time instead of focusing on the matter at hand.