Everything Peter said and more.
The best thing about this sequel is undoubtably combat. Fable 2 features a combat system that makes the combat in the original seem very clunky. Now you can transition from different styles more easily and it feels really fluid, even if each aspect is controlled by one button. Also, the experience multiplier has been revamped. Originally, getting hit would eliminate the multiplier, now it is cummulitive and effects the entire pool of experience you absorb.
Outside of combat, the relationship/marriage aspect of the game has been beefed up. You can now have children with your wife/husband, and you can pick any home you want for your family. If you can buy it, they can live in it. Family is a feature that adds a lot of attachement to the game and really elevates the story.
There are a lot of other great improvements, but I think what really stands out in this game is the Fable team's passion to deliver a game that is above and beyond any previous standards ever set. To me, this game delivers in spades...
...but, there is still a few things that could be improved. To me, co-op seems to be missing out on a lot of things that could put this over and beyond great, it just feels like something the team rushed to get for release. Don't get me wrong, it's awesome to play with my friends in Fable 2, but using a henchmen and screen sharing put this one strike shy of out. Magic didn't feel right in this game either. You don't have a mana bar in Fable 2, but rather charge the spells. This balances the game out very well, but in the end, I felt that all the spells were too similar. The charge system that makes this system work, steals the "magic" from using magic. I have other minor complaints, but in a game this size and fun, you can't expect everything.
No, I didn't forget the dog. In Fable 2, you revieve a dog that hunts down treasure and finds dig spots for you throughout your adventure. You can train him and teach him tricks and he changes according to your alignment. This all sounds good on paper, but I never felt as attached to my dog as I thought I would. He's awesome to have around, but "training" your dog really boils down "upgrading", and that always felt weird. I didn't really feel like he was personalized, which is a very strong selling point in this game. Not to sound cold, but I could take or leave the dog.
I know I write a lot, but I'd just like to close with this- Fable 2 is an AMAZING game. You owe it to yourself to buy it and play it, because it will keep you coming back for years to come as you wait for the next Fable game. Peter Molyneux and his team did an amazing job with this game and they deserve serious accolades. The next step for the future of this game series is depth, because no matter how you do, you will beat the main quest within 20-30 hours. In reality, you could suspend the main quest indefinintely, but the game's story is also very awesome, and I think you'll be as anxious as I was to see how things work out. Anyway, hope you enjoy the game! :)