Agreed, that is currently Xenoblade. And I doubt it's the last one, either.
Both. I thought the combat, though needing polish was a better direction in II, and the story was leagues better in I (particularly how they ended several characters' arcs). Ironically enough, Xenoblade's combat system is what I consider the evolution of Ep. II; the break and combo system, only done right.
Mind you these are only my opinions, as much as I disagree with GAF's praise of III and will say so in a heartbeat, they're entitled to it.