I admit it's been a while since I played Fable, but i definately remember the Sword Of aeons being significantly more powerful than any other weapon in the game, not just from a story point of view but actual damage wise too, and The weapon FAQ and Legendary Weapon FAQ on gamefaqs seem to back this up.
Anyway, you've made me determined to double check when I get home from work tonight lol.
Out of interest, are you playing the plain originial xbox version? Or lost chapters/Pc version etc?
Edit - From that Gamefaqs link in your post:
NOTE: This sword's strength has been dramatically reduced
in The Lost Chapters. If you spare your sister, you will get a copy of this
sword that is exactly the same, but looks different. (Avo's Tear)
Heh, problem solved. I played just the original Fable.
We're both right