LucasArts came up with a basic idea for KotOR 2 and asked BioWare to do it. BioWare had decided to concentrate on some original properties and ideas (which eventually became JADE EMPIRE, MASS EFFECT and DRAGON AGE) and turned them down, but suggested Obsidian, who had just formed out of the ashes of the excellent and experienced Black Isle, instead.

Obsidian agreed to the job and were given an ambitious but doable time frame for the game, to be released in the middle of 2005. But LucasArts then had a major cash crisis (it's still unclear why, as their parent company Lucasfilm certainly didn't have any money problems at thist ime) and with only a couple of months' warning told Obsidian they needed the game out for Christmas 2004 to make some money ASAP. Obsidian simply didn't have time to do anything other than finish off the plots they had completed and leave everything else hanging in mid-air.

When LucasArts started talking about KotOR 3 the following year, Obsidian seem to have told them to go jump in a lake instead if they couldn't guarantee a decent development time and, since BioWare weren't interested, LucasArts canned the third game.