One of the notable changes about the combat system in Fable III is the weapon morphing system. The weapon will change appearance to reflect the character and the choices you make with it. As for the magic, the developers completely revamped the spell-casting system. You will be able to access the most powerful level of a spell from the very beginning, but the time it takes to power it up takes a very, very long time. (IE: You will probably get yourself killed three times over when attempting to use it early on.)
Fable 3, due out for the 360 in October, the PC release date has yet to be revealed. Below are five screenshots and the video, which has a nifty tab directing you to the other dev diaries and videos
Man, I love Fable