[UPDATE] Sources say sequel to role-playing game was just beginning when 38 Studios went under; mystery publisher pulled out of $35 million deal to finance follow-up after Rhode Island expressed concern with company.

The Kingdoms of Amalur: Reckoning sequel that 38 Studios founder Curt Schilling confirmed was in the works in February was in pre-production, and was aimed at "improving everything," Joystiq reports. Unnamed sources told the site the team at Big Huge Games wanted to make a sequel with better graphics, no loading screens between zones, expanded combat animations, fewer branching quests, and the ability for players to affect the game world at a deeper level.

Kingdoms of Amalur: Reckoning 2 had bold ambitions, sources say.

38 Studios went belly up last week, with all employees across it and its subsidiary Big Huge Games laid off. The site reports that even if Big Huge Games were to continue to exist under a different banner, the team would likely not be able to work on Kingdoms of Amalur: Reckoning 2. Though 38 Studios presently owns the Amalur intellectual property (believed to be valued at around $20 million), the company is likely to be forced to hand it over to the state of Rhode Island as part of a collateral arrangement originally agreed upon as part of the 2010 $75 million loan that brought 38 Studios to the Ocean State.

The site also reports that Electronic Arts--which published Kingdoms of Amalur: Reckoning--passed on working on the sequel due to "executive politics." 38 Studios then sought other publishing partners for the game, though no companies were named.

[UPDATE] Rhode Island newspaper The Providence Journal reports today that an unnamed publisher pulled out of a $35 million publishing deal for Kingdoms of Amalur: Reckoning 2 after word came that 38 Studios may be in trouble.

Kingdoms of Amalur: Reckoning shipped in February to a warm critical reception and sales of 1.2 million units over 90 days. Despite this, Rhode Island governor Lincoln Chafee said the game was a "failure," and needed to sell 3 million copies to break even.

Troubles at 38 Studios first came to light earlier this month, when reports from the Rhode Island government indicated that the company had failed to make a $1.125 million loan payment to the state's Economic Development Corporation. The studio eventually made the payment, but it also enacted a round of unspecified layoffs, before shutting down completely.

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