Peter Molyneux's confirmed at Gamescom that Fable II will be re-released on Xbox Live as five downloadable episodes.
The first Fable II episode will launch on September 29 as a free download, the Lionhead man said. After that you'll be given the option to pay to download the next chapter.
The re-release will be fully compatible with Fable II's DLC packs, Knothole Island and See the Future, but there are no pricing details as yet.
UPDATE: Full PR follows:
While "Fable II" has become the best-selling role-playing game of all time on Xbox 360, there are some who still have not experienced the magic and adventures that await them in Albion. For those who have watched from the outside, unsure if they were hero material, a surprise awaits. Microsoft and Lionhead Studios are about to embark on a new journey with the episodic release of "Fable II" on Xbox LIVE. The launch of "Fable II: Game Episodes" will debut Sept. 29 with the release of the first episode for free download exclusively on Xbox LIVE.
In the first episode, players will experience childhood and the trials of being a young adult in the world of Albion. After completing the chapter, players have the choice to then purchase the next installment or the entire game (in select regions). "Fable II: Game Episodes" delivers the entire "Fable II" experience in five consecutive instalments, with all the Achievements, challenges and excitement of the disk-based game, as well as full compatibility with the previously released Game Add-ons, "Knothole Island" and "See the Future." The episodes are also fully compatible with the disk-based, retail version of "Fable II," allowing players to enter Albion and continue their story should they purchase "Fable II" at retail. All editions of the game offer cooperative play with friends on the same couch as well as on Xbox LIVE.*
"With the launch of Games on Demand on Xbox LIVE, we have a great tool in place to deliver classic titles in an incredibly convenient fashion," said Phil Spencer, general manager of Microsoft Game Studios. "With the 'Fable II' episodic model, we're encouraging people to experience the first chapter of the game for free, then move onto other chapters when they are ready. It's a unique model and one that will appeal to gamers who've been hesitant to dive full into the original retail release."