Boldly copied from Monstrous Manual
The thing that makes kobolds so crucial to Herzog is quite amusing: some time ago kobolds were left without "supervision" and for reasons unknown (presumably they gained services of a powerful wizard) they developed a weirschool of magic. First and foremost, every their spell is followed by Wild Surge. Second, the visual appearance of their spell effects differs from typical - thus their Fireballs may of any color but red, their Magic Missiles may be zebra-colored and so on. Besides they have several unique spells:

Rocky Arrow (Alteration) Lvl:1.
Can be cast on a bolt, arrow, dart, javelin or throwing knife. If the target is struck he must save vs. spell or be turned into reddish rock for 1d2 rounds. While in this form target is immune to normal weapons and 1st lvl magical spells. When the paralyzation wears off for 1d2 rounds the target feels stiffness in his limbs which results in -2 penalty to DEX.

Rock Disguise (Alteration) Lvl:2.
Resembles "Meld into stone" spell. The caster turns into red rock statue of himself for a # of rounds 3 times bigger than the caster's lvl. Casters over 6th level can control the time they pass out of this state, but others - can't. (NB: usually this spell is used by ambushed casters who summon help and then turn into rock to wait for the approaching patrol; sometimes kobold scouts use it for disguise but in other terrains it hardly helps to delude foes).

Rock Shield (Abjuration) Lvl:3.
3d4 small rocks appear around the caster and start flying aound him, shielding him from melee and range attacks. In the latter case they improve caster's AC by 4. In melee they improve it by 2, but every round the caster's opponentmust check DEX or be hit with a rock for 1d4+1/lvl of the caster HP. The effect lasts for a number of rounds equal to the caster's lvl but not exceeding 10.

What is probably unknown to the humans but is true beyond doubt is the vital part the Red Rock plays in the magical sphere of kobolds' life. All kobolds over second level of experience carry small chips of it as necklaces which grants them a power similar to Rock Disguise once per day and magical power to create one Wild Surge influencing someone else.
Thus their magical abilities render them dangerous. Battling them you never can predict the outcome - their Wild Surge can demolish all your troops, blow all ofthem to dust, summon a stark Tarrasque or just paint all of your troops purple. It takes a risky commander to venture against kobolds. On the other part, they don't aim at expansion, all they need is peace and ransom or military assistance.
Kobolds have their own axe to grind - they have their own mind against orcs. After all they aren't as thick as a brick - they perceive that whatever orcs say kobolds can hardly count on being given autonomy in the Orcish Empire. 1