The #2 wire senses system voltage. If it's connected to the battery terminal of the alt it will shut off the alt even if the system voltage is lower than 12 volts, as long as it's 12 volts at the alternator. So in general the alternator charges at a lower rate than it should. It works in most cases, but can cause problems in battery life.
It should be hooked at the power buss, in some cases this is at the starter, or on a firewall junction block. This will read the voltage of the whole system, and will cause the alt to charge at a higher rate.
Now, on the #1 terminal hooked to accessory on the ign sw. A situation that could burn out the diode trio would be a couple electric fans hooked to the accrssory terminal. If the fans are running, and the switch is turned off, they can draw current though the #1 wire, overloading the diode trio. You need something in line to limit the amperage that can be drawn on that wire. It can be bulb, a resistor, or a diode. You can get a diode at Radio Shack for under $2 that will protect the alternator.