This topic's a tough one for me because I'm pretty biased in favor of all of Dark Tranquillity's works since they're probably in the top 5 of my favorite bands, but my favorite stuff was right at the beginning of the band. Although Damage Done was #2 album of 2002 in my top 20 (shameless plug:
http://www.uraniummusic.com), I get the most emotional response out of efforts like Skydancer and the demo material. Staane's a way better vocalist then Friedan ever was in DT (Of course, he's evolved as well to become something great), but the material written around the Skydancer era was amazingly put. The lyrics shone through much better then later day releases, the rifts were emotional and impressive at the same time, and the band shined.
But the thing with most bands is there are some that are completely content with writing the same album over and over again, and it's usually those bands that run out of ideas the fastest. After "Seasons in the Abyss", Slayer just ran out of ideas and decided to let their music evolve, for better or worse. Anthrax were becoming stale until Sound of White Noise rejuvinated them. And In Flames decided not to release Colony part 3 and decided to tinker with their sound.
Dark Tranquillity, being one of those bands I hold in high regarde in the metal world, also felt the same way. My favorite album besides Skydancer was "The Mind's I", but even that was getting a little tried and true. Let's face it, if you own The Gallery, then you knew what to expect on The Mind's I, although DT are the type of band that can keep it fresh. However, if Projector were "Minds I Part 2", it probably wouldn't have gone anywhere. The band, before releasing rehash, decided to experiment, change it's elements. And in the opinion of the band, the clean vocals failed (which I disagree with, if used sparingly they added so much to the song, case in point Freecard), which is why we got Haven (for some reason, my least favorite). Damage Done was the closest thing to a safe album we got this year as the band decided to take some of the newer elements and try to write a hybrid between Projector and The Mind's I.
Overall, though, I think DT merely adapted to change rather then become one of those rehash bands, which is fine. Damage Done was definately one of my favorites, but DT have molded themselves to a point where I have no idea what the next album will sound like, whereas the new Soilwork I already know I'll probably get into and I haven't even heard a song yet. However, I'll REALLY get into the new Dark Tranquillity if it's good, and given the track record, I seriously don't think I'll be disappointed.
So to answer the question, no I don't think they've declined over the years, but tried their hand at different elements in order to keep the band fresh and to thus prevent the band from running the idea mill dry.