Several generations ago, one of the many nomadic Kobold tribes found their way into the mountains. Stumbling around and looking for a place of refuge, they found seams in the mountain through which they delved into it's depths.
Crawling through the fissures in the earth, they clawed through the darkness until the all-encompassing stone walls fell away into emptiness. Awestruck, they surveyed the enormous cavern. Cylindrical, the walls were etched with walkways and dwellings. After cautiously exploring the long forgotten depths, they found it devoid of signs of life save for the decrepit skeletons of Dwarves and Kobolds.
Kobolds are an interesting race in that they insist that they were once glorious. To listen to them, you would believe that they were once the lords of all they surveyed, and that the current prominent races usurped them from their glory. It was with this mindset that they came to the conclusion that the ruins, actually Dwarven in origin, were the remains of the capital of their once-mighty empire.
Casting the Dwarven skeletons into the depths, they set about doing what they could to repair the ancient structure. For the first time since days long forgotten, the lights of the forgotten city began to burn once more.
A number of generations later found the settlement beginning to thrive. The original entrance long since blocked due to a cave in, the thin fissure they first entered from functioned as their main entrance. It was widened as time passed, but it remained small enough to only be easily passable by one the size of a Kobold.
Drawing their own conclusions about what had happened, the Kobold decided that their kingdom had been ransacked by Dwarves, and their holdings taken as they were cast out. It was their belief from that point on that the cities of the Dwarves were actually of Kobold workmanship, as is any "Dwarven" equipment. If confronted with the fact a given Dwarven Axe is clearly fresh from the forge, they would respond with a smirk and deem it an example of what fine craft they once possessed, that such an ancient thing could seem so new.
They eventually came to the decision that, now that they had reclaimed what was obviously their capital, they should begin aiding their kin still lost in the wilderness and hunted as vermin. So it was that their Emperor (A sorcerer who's divinations conveniently revealed him to be of royal bloodline) commisioned the creation of the imperial agents, free roaming scouts charged to lend aid to their kin and, when possible, lead them back to the city.
At present, the influence of the growing city can be felt in the region around it for a good distance. Tribes of Kobold that were once simply annoying have become outright deadly, and have been spotted being led by Kobold outfitted in reworked Dwarven armor and bearing Dwarven weapons, both of which evidently extraordinarily old. The city itself has been growing steadily, and has become actually reasonably well populated.
Though delusional about their past, the Kobold aren't stupid. They can prove cunning foes, escpecially the Imperial Agents, the cream of the crop.
The City itself, which the Kobold have deemed Karryk-Mos (Car-ick Moss), is built into the wall of the interior of a dead volcano, hence the cylindrical shape.
The Kobold have found the old armories, smithy, deep river (from which they fish) and the half-collapsed mine. They are using all they can.
The ancient weapons and armor, though of still exceptional quality, are ill sized for Kobold use. They have begun forging their own equiptment as best they can, and have even recently obtained the skill (and schematics) required for crossbows.
The Imperial Agents are quite capable, and are frequently underestimated. Having honed their skills in stealth and ambushes on Goblins in the mountains, their primary combat style is comparable to that of assassins.
The Agents are, along with bringing tribes 'back' into the safety of the city, responsible for eliminating threats to Koboldkind. Unfortunately, they see most people as threats until proven otherwise.
The Dwarves have been having to deal with a shocking increase of Kobold efficiency as of late. Midnight raids, tunnel collapses and more have been striking with almost surgical precision, and with a coordination not seen prior in Kobold tactics. The Bewildered Dwarves are looking for any assitance in dealing with this unexpected new threat.
The Kobold have realized that, despite their 'returning glory', they are still in a fragile state with little support lines. If their city is discovered, they will attempt to backtrack over any offenses they have made and set up some level of trade, both for the profit of their city and in the interest of easing the suspicions of any groups they may be dealing with.
If the PCs are in good standing with one or more of the towns or cities attempting trade, they may be called upon to venture into the city as ambassadors.
Though there will be some that will be honestly interested in training, a large number, particularly among the Imperial Agents will see this as an oppertunity to further their cause with diplomatic cover. They will take this oppertunity to assassinate prominant threats and attempt to seed dissent among their foes.
Excavating the collapsed mines, the Kobolds find a vein of precious metals, and possibly gemstones. Using this wealth, they hire mercenary bands and begin seeking to purchase any magic they can find. With their strength growing rapidly, they may soon feel it's time to strike out and begin 'reclaiming' their ancient holdings.
Maybe, just maybe, the Kobolds are actually correct. Perhaps they once did hold a vast underground kingdom, and this was, if not the capital, one of the greater cities. Perhaps they heavily influenced the work of the Dwarves, and they are preserving the last ember of their once great empire. If this came to light, it would cast large sections of history in another light, and could see a signifigant change in the level of acceptance of Kobold in modern urban centers, if Kobold are willing to play by the rules of the younger races.