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The best sword in Fable II, to the best of my knowledge is the Daichi. You get from going to Garth's tower (after you have reached bloodstone and spoke to Reaver) to the cullis gate and going the the left once going up the stairs, you should be prompted to jump when against the broken stone railing. You will end up in a place called 'Archon's Knot'. Just complete the puzzles in there and you should get it (its on the right after you have completed the puzzles and left Archon's Knot).

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