From Diablo Wiki
Development on Diablo III was begun at Blizzard North in 2000, and continued (through many rough spots) until 2005, when Blizzard North was shut down. Diablo III's development was restarted almost from scratch at Blizzard Irvine in late 2005, by an almost entirely new development team, and it has continued from there.
End of Blizzard North
Delays and problems ensued, the "Big Four" (Bill Roper, plus the three company founders; David Brevik, Max Schaefer, and Erich Schaefer.) left in early 2003 to form Flagship Studios, and Blizzard North ultimately closed in summer 2005, without ever announcing, much less releasing, another game.
Almost all the remaining employees of Blizzard North were offered contracts at Blizzard Irvine, and while some took those jobs, most quit and looked for work at other game developers in the Bay Area.
Blizzard North's Version of Diablo III
Though Blizzard has never made any official comment on the changes to the project during development, some unofficial info surfaced in 2010 and 2011. Screenshots (allegedly) from the Blizzard North version surfaced in February 2011, showing levels set in the High Heavens. A couple of months later, Max Schaefer revealed in a podcast interview that work was underway on Diablo III when he left the company in 2003, and that the early plans were for an MMORPG, with a setting similar to that of Diablo II (and not in the High Heavens, indicating that design came in after 2003).
- See the Blizzard North's Diablo III article for many more details and visuals of this issue.
Diablo III Continuity
According to various insider accounts, virtually none of the early work completed on Diablo 3 remains in the current version, which was begun almost entirely from scratch by a new team in Irvine in 2005. Bill Roper discussed this in an interview in early 2009. 
- IncGamers.com: Blizzard North had previously been working on the third Diablo, from what I understand?
- Bill Roper: There was definitely work on it up north, but whenever something switches to a different team or a different lead, they pretty much tend to scrap everything.
- IncGamers.com: So everything was just thrown out, and started again?
- Bill Roper: I would guess so, but I have no actual knowledge of what they did or didn't do, as that was well after we were gone. But I wouldn't be surprised – there's hardly anybody from the original team or even the Diablo 2 team that's there – so my guess would be that they thought “Great, we have this awesome thing that we're working on,” so the designers and artists there would now be able to put their visions into the Diablo universe. Nothing that I've seen looks like anything I ever did with the game, so I would imagine they got rid of the vast majority of what I did when I was there.
- Consult the Diablo III History article for much more detail about the creation of Diablo III, starting in 2000 at Blizzard North.
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