A little bit of an round-up of the features we 'know' are going to be in Fable III
1) No experience anymore. You grow in power and such from the amount of followers you have.
2) No health bar. The game environment is now the indicator like Gears of War/Call of Duty with the screen showing how close you are to death.
3) Weapons are the 'upgrades' now and will be unique to your character. You make the weapon what it is by your deeds and choices.
Example: You kill lots of innocents then your weapon will look evil and drip with blood. You kill evil doers, your sword will glow with heavenly power. You hunt down animals and slaughter them, your sword will be gilded with icons of balverines or bones.
4) You can now 'touch' NPC's. This involves tapping the trigger buttons and you lead them wherever you want too. In the demo he showed this was too a nice safe place, and the other, struggling with the NPC and dragging him off too the poor house to be sold into slavery. He also demoed seeing your daughter and picking her up, playing with her. And another, scolding her.
5) The weapons mentioned earlier can be sold across Xbox Live and each one will be individual since it was crafted by your own decisions in the game.
6) Co-Op will now be BOTH players heroes and you will have both your dogs. You will also be able to split up and go wherever you like in the world your playing through, no stuck to the same screen anymore.
7) No HUD at all, the screen will just be you and the world, indicators from the environment and the characters within it being your cues (aka your dog still sniffing out treasure and the breadcrumb trail showing the way to go)
8 ) Showing your true colour's will come in the form of a pair of mighty ethereal wings that sprout from your back during combat and when cued by an emote. These will either be angelic or demonic depending on your alignment. (and they don't look silly either which is good) This will be matched with tattoos on your body akin to those of Illidan in Warcraft and such.
Think thats all of it. Also if you watch the video diary you will see a lot of the aesthetic changes like the wings talked about and the combat changes. It looks a lot more dynamic and fast flowing, with some interesting take downs. Basically they are making you into one bad-ass hero this time around.