After sampling the delights of Fable 2 (more on that soon) Joystiq had a little chat with Peter Molyneux about death. Specifically, Joystiq talked about how death would be treated in Fable 2.
Typically, death in video games means loading the previous checkpoint or restarting a given level. According to Molyneux, such will not be the case in Fable 2. Instead, when overpowered and bested by an enemy, players will be left with a permanent reminder of their defeat: a scar. Granted, the scars are cosmetic, but they do affect how NPCs perceive the main character.