You didn't mention which version of Delphi...
Newer Delphi versions have added two new properties to TCustomForm: PopupMode and PopupParent. Setting PopupParent of your modal dialog to the form that's creating that dialog makes sure that the child form stays on top of it's parent. It usually fixes the problem you're describing.
I think this pair of properties were added in Delphi 2006, but it may have been 2005. They're definitely there in Delphi 2007 and up.
EDIT: After seeing you're using Delphi 7, the only suggestion I have is that, in the code that displays your modal form, you disable the form creating it, and re-enable on return. That should prevent the creating window from receiving input, which may help keep the Z-order correct.
Something like this may work (untested, as I'm no longer using D7):
procedure TForm1.ShowForm2;
begin
Self.Enabled := False;
try
with TForm2.Create(nil) do
begin
try
if ShowModal = mrOk then
// Returned OK. Do something;
finally
Free;
end;
end;
finally
Self.Enabled := True;
end;
end;
If Form2 creates a modal window (as you've mentioned), just repeat the process - disable Form2, create Form3 and show it modally, and re-enable Form2 when it returns. Make sure to use try..finally as I've shown, so that if something goes wrong in the modal form the creating form is always re-enabled.