I have the exact same problem. I believe that it is due to an incompatible video card that does not support vertex shading or hardware texture and lighting. Check the Fable website at
http://www.microsoft.com/games/fable/support.asp
and look at the list of video cards supported by this game. If you dont know what your video card is, click on "start" and then "run" and type "dxdiag," and then look at the display tab. If your video card is supported, go to the manufacturers website to make sure you have the latest drivers installed. If the video card is not supported, try updating it. Hope this helps. Post a reply if you find a solution.