Well, I don't know the full story but I am going to give you what I know. Its codename was Project Joe Jackson minus the Joe.
In Dark Alliance II: Karne was looking to get the artifacts before the Harpers were. However, when the Harpers got the artifacts, Karne found out that somebody was spying on them and learned of Mordoc's plot. Now Mordoc wanted the Onyx Tower reactivated because he would be the only person who could enter it (He just had to add Mordoc's Gate to the tower) for his allies in the East. Now, Keep of Pale Night is located in the Battle of Bones. So that gives you Cormyr, not evil, Dalelands, Zhentarim controlled, Mordoc's enemies. If you go far enough east in 3E Forgotten Realms, you will get Mulhorand. In the Keep of Pale Night, skeletons come out of Sarcophagi, Egyptian themed. Mulhorand is also Egyptian themed. At the very end, it is confirmed, Mordoc's leader is a Pharoah God-King from Mulhorand.
He tells his cleric/or priest to ready the Tomb Soldiers and his Sun-Barge to invade Baldur's Gate and destroy the city for the sake of the Pharoah God-King's Sacred Mission. Now what could these Tomb Soldiers be? Probably just a whole bunch of those skeletons you see in the Keep of Pale Night but in greater numbers and possibly magic (Cant have a Faerun game without magic right?) Sun-Barge, this gives you few hints, other than he could be part of the Mulhorandi Pantheon, not likely, or an enemy of theirs, likely. Sacred Mission - Panago Pizza.
Now, like I've said before. I've tried to find out information on this canceled game's story. Its just not happened. Although, Chris Taylor did tell me it was in works at a time, he did not know the story or how far into development it was.
I have not read it all. But I think it means that Snowblind had the rights to make a Baldur's Gate: Dark Alliance game or just a Dark Alliance game (No Forgotten Realms at all) for a time, but they were not able to and in late 2007, the rights went back to Interplay. I'll update this more later.