Sequels are funny things. Some are more "new installments" than real sequels, having far too little in common with the previous installment to be able to call it a real sequel- you can hardly describe Metroid Prime as the "sequel" to Super Metroid. Spin-offs and "spiritual sucessors" are also not sequels, otherwise I'd consider Samurai Warriors to be the best sequel to Dynasty Warriors, when it's actually a new series. And some games are kind of hard to evaluate as sequels simply because the original went so far under the radar it virtually doesn't exist- most people consider Street Fighter II to be its own game because, well, how many people played the original Street Fighter? (I have, it was rubbish.) Plus I only count games where I've actually played the previous installment, oitherwise I can't really judge how well the sequel compares directly to its predecessor.
That said, my favourite sequels are:
*Shadow Hearts Covenant
*Zone of the Enders: The 2nd Runner
*Final Fantasy VIII
*The Legend of Zelda: Twilight Princess
*Castlevania: Aria of Sorrow
*Super Metroid
*Grand Theft Auto: Vice City