In his Blog Mike West Talks about Scripting at Lionhead for Fable 2
The Quest is Designed; Dene comes up with a basic design for a script, and then working with Alex (one of the other scripters) and myself, we flesh it out and come up with a detailed design doc.
The Entities Are Placed; The scripter assigned to the quest takes the design doc and places the relevant creatures, markers, characters, everything used within the quest.
The Script is Written; The scripter then starts writing the meat of the script in lua, referencing all the entities they have placed, and then adding the dialogue from the text document.
Playability Testing; Design then take the script and play the basics, see if it works as an idea. If so, it gets passed, otherwise it gets redesigned.
Script Refined; After this point, all the elements of the script are refined, gradually getting closer to the final product. The correct creatures are added, the dialogue is re-written by a professional writer, a first pass of the dialogue is recorded (by a few of us in the company), the regions are prettied, and the quest generally looks a lot better.