It's just a sword. You equip it. You kill things with it. And if you're lucky, the thing should come with some very good stats. Haven't you tried identifying it?
That sword is just treasure you can keep or sell. There's another sword in the Elven Dark Forest that has a quest associated with it. That must be what you were thinking of.
Its also a very good sword to keep reloading and try to get better stats, since its pretty conviently located. I did that and after a few tries I got a frost/life drain one with quite a few charm slots too.
I did that for just about every decent treasure my second time playing the game. Dear lord bejeezuz did it take a long time. I love it when I get a charm 5 / everything awesome the second time I reload though. <img src="/ubbthreads/images/graemlins/delight.gif" alt="" />