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JGarret said:
Final Fantasy 7 - 1997
Saga Frontier - 1998
Xenogears - 1998
Brave Fencer Musashi - 1998
Parasite Eve - 1998
Final Fantasy 8 - 1999
Final Fantasy 9 - 2000
Vagrant Story - 2000

Look at that output!

Konami and Capcom were much better too...now, I can understand fewer games as budgets increased, but why is it that the QUALITY also went down in a big way?

Adding more to  your list.

Chocobo's Dungeon 2 - 1999
Chocobo Racing - 1999
Ehrgeiz - 1999
Chrono Cross - 2000
Front Mission 3 - 2000
Legend of Mana - 2000
Parasite Eve 2 - 2000
SaGa Frontier 2 - 2000
Threads of Fate - 2000

I think the reason quality went down is that Sakaguchi left Squaresoft before the merger and took a lot of people with him.  He was pretty much replaced during that time anyways as he didn't have a hand in developing any PS2 titles as far as I know.  Kind of like Kojima with Lords of Shadow, I think he's credited for some titles he has nothing to do with.