Shyamalan achieved commercial success in 1999 when he wrote and directed The Sixth Sense, a supernatural drama about a psychologist (Bruce Willis) who blames himself for a patient's suicide and his own broken marriage. Upon meeting a disturbed child (Haley Joel Osment) who claims to see people who have died, the psychologist feels he has a chance to redeem himself. According to the book DisneyWar, David Vogel of The Walt Disney Company read Shyamalan's script and, without obtaining approval from his superiors, bought the rights to it for a high $2 million and allowed Shyamalan to direct. Vogel's bosses, disagreeing with his decision, sold the profits to Spyglass Entertainment and kept only a 12.5 percent distribution fee for itself.

The film had a $40-million budget, and grossed over $600 million at the box office worldwide.

The Sixth Sense was nominated for six Academy Awards, including Best Editing, Best Supporting Actor for Osment, Best Supporting Actress for Toni Collette, Best Director, Best Picture, and Best Original Screenplay. The Science Fiction and Fantasy Writers of America awarded it a Nebula Award for Best Script of 1999.

Signs
Main article: Signs (film)
Opening in August 2002, Signs is a science fiction drama of a rural Pennsylvania pastor (Mel Gibson) who has lost his faith after his wife's death and regains it with his family as they witness the worldwide events of an alien invasion. Joaquin Phoenix, Rory Culkin, and Abigail Breslin also star. Budgeted at $72 million, Signs grossed $227 million domestically and $408 million worldwide. It was the highest-grossing film as well as the highest opening-weekend gross ($60 million) of Gibson's career as an actor.

The film received a generally positive reception. Most notably of which was Roger Ebert's four-star review, stating, "M. Night Shyamalan's Signs is the work of a born filmmaker, able to summon apprehension out of thin air. When it is over, we think not how little has been decided, but how much has been experienced".

Shyamalan said in an interview with Science Fiction Weekly that his choice of Gibson was based in part by the actor's emotional role in the film Lethal Weapon: "I was on my parents' sofa watching the video of Lethal Weapon, and then this guy did stuff emotionally that had no business being in an action movie. ... I completely believed the humanity of a man who was so torn by the loss of his wife that he wasn't afraid of dying, which made him a lethal weapon. ... When I wrote the movie about a guy who loses faith because his wife has passed away, I felt like that was the guy. And I also like taking an action guy and not letting him be The Guy."

Shyamalan also said that originally, there was going to be very little music in the film, but that composer James Newton Howard's intense and emotional compositions reminded him of a Bernard Herrmann (Alfred Hitchcock's frequent composer) score and prompted him to change his mind.

Drawing on Wuthering Heights after being offered to pen a screen adaptation, Shyamalan went to work on what was originally titled The Woods.[21] The Village was released in July 2004. A drama starring Joaquin Phoenix, William Hurt, Sigourney Weaver, Bryce Dallas Howard, and Adrien Brody, it tells of a small, 19th-century community run by a group of "Elders" who seem to be content in their isolation from the outside world. The village is encircled by a forest said to be filled with mysterious and threatening creatures. Even as an uneasy truce between the villagers and the creatures seems to be falling apart, one villager (Phoenix) starts to question their forced isolation.

With total production costs of $71.6 million, the film grossed $114.2 million domestically ($50 million in its opening weekend) and a further $142 million in non-USA receipts. Its successful opening weekend in America was followed by a severe dropoff of 67%, and the film is generally considered to be a commercial disappointment. Critical response was mostly negative: Desson Thomson of The Washington Post called it "a bewildering disappointment";Kevin Thomas of the Los Angeles Times said, "It's tedious instead of provocative and so unconvincing as to be preposterous." Roger Ebert, who had previously praised Shyamalan, called the film "a colossal miscalculation, a movie based on a premise that cannot support it, a premise so transparent it would be laughable were the movie not so deadly solemn. . . He is a director of considerable skill who evokes stories out of moods, but this time, alas, he took the day off".

Shyamalan expressed a great deal of regret in the way the film was marketed, telling producing partner Sam Mercer, while overseeing the editing of the teaser trailer for Lady in the Water, that he had wished for the The Village to have been sold as a period romance with a scare only at the end of the trailer. Shyamalan is also said to have thought that the shift in the main theme of faith from his previous films to that of deception resulted in the mixed-negative response. Citing that his other movies set out to make an audience believe in the supernatural, The Village set out to do the opposite.

The Village earned an Academy Award nomination for Best Original Score.