For my question, the answer is... components! keep in mind this is a US version
According to the '05 catalog Reign 2 specs that differ from 3 are as follows:
Fork - Manitou Nixon Elite. This fork was originally spec'd at 6" travel, but with the Reign suspension, the tire ended up eating the headset at full compression, which was obviously disastrous for riding. Manitou fixed this by installing travel-limiting spacers that resulted in a loss of 0.5" travel, or limiting the shock to 135mm instead of 145mm of travel. I haven't had any reason to complain, still works fine, not sure if the Aussie version of the fork has the same travel issues, might want to look that one up on your own.
Brakes - Hayes HFX-9 XC Hydraulic discs, 6" dia.
Wheels - Alex DP20 w/ carbon hubs
Drivetrain - Shimano XT derailleur and shifters, LX front Derailleur and shifters, Race Face Evolve XC X-Type crankset
Reign 3 specs
Fork - Manitou Splice Elite w/ 5" travel
Brakes - Hayes SOLE XC Hydraulic disc w/ 6" rotors
Wheels - Alex DP20 w/ alum hubs
Drivetrain - Shimano LX Derailleurs front and rear, Deore shifters (same as Reign 2), Race Face Ride XC ISIS Crankset
Difference between the two
The Reign 2 is basically spec'd with better components for shifting, braking, wheelset, and drivetrain. There is nothing wrong with the R3's components, but the R2's are a step above. Think of the R3 vs R2 vs R1 as a good, better, best kind of deal. There is no crappy version. They all have fantastic components, the question is, are you going to want room to upgrade, or do you want the top of the line right off the bat? The R2 gives me the best compromise, not too hot and not too cold, its perfect! (for me). I guess it's more of a psychological thing, if I bought a R3, I'd know I want to upgrade, but the R1 was priced out of my range. For me, the R2 offered the performance at the price without a compromise, and it worked out perfect. Just my opinion, if you can't get your hands on a R2, but have a R3 available, I wouldn't pass it up, the half inch travel in front suspension can always be rectified by picking up a better fork down the road.