Basically, Daggerfall had multiple endings. I don't want to spoil the story to all of our new Daggerfall recruits, so I'm going to word this very ambiguously. In essence, the Iliac Bay (the gulf shared by the southwestern edge of High Rock and the northern side of Hammerfell) was governed by three major powers: Daggerfall, Wayrest, and Sentinel. These three vied for control of the area, along with lesser powers such as the original King of Worms and Gortwog of Orsinium - the city state of the Orcs prior to their inception into the Empire as respected citizens.
In the end, one of multiple endings could occur, in each one of the major powers conquering its rivals and taking full control over the Iliac. Other notable possible outcomes include the Orcs becoming recognized citizens of the Empire and the King of Worms
. All of these events had happened simultaneously, causing a paradox. A dragon break was created in order to correct this and make time linear (and come up with a lore-correct ending to carry over into Morrowind
). All these outcomes happened, and yet they did not. Each event happened, but they also cancelled one another out.
You could see the outcome of Daggerfall, Wayrest, and Sentinel all simultaneously conquering the Iliac Bay much like you could imagine making three wine stains on different sections of a map. Each stain (each kingdom's influence) spread simultaneously, albeit stopping when encountering the other. The result? All the lesser kingdoms where simultaneously conquered by Daggerfall, Wayrest, and Sentinel, while at the same time these three major powers continued to exist. Similar occurrences led to things such as the existence of a duplicate King of Worms in Oblivion.
It's complicated and I probably contradicted myself, but that's basically how it goes.