As well as Fable III, Peter Molyneux announced during the MS conference in Cologne this morning that Fable II will be released on Xbox Live Marketplace, split into five chapters.
The first chapter will be free.
“This is great from a developer’s point of view. You could buy the next episode, or buy the whole thing – keeping them in-game,” said Molyneux
Knothole Island and See the Future are fully compatable. It goes live on September 29th.
More here in the livetext.