In the games you keep going back to thread, I noticed something about my own list of games. They were nearly all the second installment in one series or other. The list was this:
Heroes Of Might And Magic II
The Settlers II Gold
Diablo II Lord Of Destruction
Civilization 2
(The list also included Dungeon Keeper 1+2, but I actually prefer the first one). This led me to put forth the following hypothesis:
The second installment usually fixes the things they got wrong the first time, while later installments suffer from "the need to innovate", thus incorporating new features that don't really fit the game.
Would anyone care to comment? Or can anyone think of other series of 3+ games where the second installment was the best?
[EDIT] Looking at it now, I see that Diablo 2 doesn't really belong either, since Diablo 3 isn't out yet, but still.

Half Life 2, anyone? Doom II?
hahaha..
Anyway, seriously I don't necessarily agree with your opinion on it. While usually, yes, the second installment allows for the developers to improve on the faults of the previous game, and give more of the gameplay people loved from the first one, many times the sequel is completely different or should have just been an expansion pack because the only changes are an extended storyline..

well if you generalze a lot you can also say that the third one ruins the entire series

More great second installments:
Baldur's Gate II
Fallout 2 - seems to be more popular than 1, though personally i like 1 better
Fable II
Riven (Myst II)
I can think of some 3rd installments that are the best, too:
Morrowind
Smash Bros Brawl
Halo 3 (in my opinion, i know it's not everyone's choice)

Freespace 2 (no 3rd though)
Star Control 2
Gothic 2?
System Shock 2 (no 3rd again though, though if Bioshock counts then definitely SS2)

While there's no contest that System Shock 2 is a fantastic game, I am lead to believe that Bioshock is more popular..

Well yeah, I'm not implying it's a rule or anything, just that it happens for those reasons sometimes.
Take Settlers, for instance. I played Settlers 3 a little bit, but I didn't really like it. I've only seen some footage of Settlers 4, which convinced me not to buy it. It's just not Settlers anymore. And it seems that lots of people agree with me. They even did a remake of Settlers 2 (the 10th anniversary edition), with a completely new engine, full 3D, but kept the game itself exactly the same as the original. If that's not admitting that you screwed up all the sequels, I don't know what is. :-D

Pfft, right, if it was your first RPG ever.

I'd like to say that quite often the second in a series can be more fun, but not necessarily "better", although it does depend on how you look at games.
The difference between System Shock and SS2 mostly comprises of slightly simpler gameplay elements and more linear progression in the latter, for example, yet SS2 is more fun and the one I would look to play again in the near future.
Back to the better sequels game however...
Monkey Island 2
Jagged Alliance 2

Well I must admit I've never played Daggerfall. I played Arena and hated it (mind you this is years after it came out)
But it seems that Morrowind is widely considered the best of the entire series so far.

By which individuals? Typically if someone says their favorite RPG is Morrowind then I immediately know they haven't been playing RPGs for long, sure, a lot of people say the game is great, but a lot of people say Fallout 3 is great too, doesn't necessarily mean anyone who's opinion is worth its weight in experience believes so either.
Let's leave popular opinion out of the mix as a deciding factor and which games were actually better because of the fact that they were better designed and executed than their predecessors, not because a bunch of newbies went crazy over some tired formulaic game because they've never played anything else notable.

This is exactly the point I was trying to make with Morrowind.
Current popularity is not representative of a game's quality or superiority over its predecessors.
Bioshock isn't a sequel or even a prequel, it's just an extremely obvious spiritual successor.
Besides, Fontaine and Ryan are both two-bit losers in comparison to SHODAN.

Well, in minor defense of Morrowind, its not my favorite RPG of all time, but its my favorite Elder Scroll RPG so far. But granted I have not played Daggerfall or Arena, I tried once but I just couldn't get into it, they were too dated by that time. But from what I saw I can see how they would have been considered great in their time.

Even if you hadn't played the earlier games the chance that you'd find Morrowind an unsavory game is still very high if you have solid experience in RPGs, the game is absolutely chock full of problems that have not only been present in the TES series for all its existence, but have gone as far back as the dawn of RPGs.