Glass Daggers served two functions.
One, if you "chose" the Shadowlords in your conversation with Andrew, he'd give you one. You can use it in battle, and there's a small chance of it doing massive damage with the price of it taking a massive durability hit. (Assuming it's working properly. As you know, everything works properly in UO 100% of the time.)
Two, while it was an off-stage event, is actually more important. Glass daggers were used to slay the Ruling Council, who were ruling in Lord British's stead. The Ruling Council's massacre paved the way for Casca's ascending the throne. Casca, of course, was in league with the Shadowlords the entire time, and his ascension plunged the realm into a darkness from which I suspect it will never fully recover.
Warriors of Destiny - UOGuide, the Ultima Online encyclopedia
(Especially see the writeups for Chapters IV, V, and VI.)
Glass Dagger - UOGuide, the Ultima Online encyclopedia
Andrew - UOGuide, the Ultima Online encyclopedia
-Galen's player