When you talk to him he will explain the problem the town has been having with the Kobolds.
He wants to you head to the Kobold Camp, and kill their chieftain.
You can find the Kobold Camp by following the map above.
Once you get there, enter the camp, and follow the path over bridges and through cliffsides. (it's a 1-way path, you can't turn wrong here).
As soon as you get to the most northern point of the camp, you will see Gahanka, the Leader. He is a big troll, who hurls rocks at you. Fortunately he doesn't have too many hitpoints, and he is rather stationary, so that you can avoid being hit as long as you move around enough.
40 Kobolds must be killed before Gahanka shows-up. There will be a counter showing the kills.
Once Gahanka is slain, run back to Thelal, and finish your quest. Your reward will consist out of large quantities of gold, a fair amount of experience and a number of quest-given items upon completion.
Below is a video walkthrough of the quest:
Bug?: When first given this quest has a difficulty rating of 2 stars, but at some point goes up to 4 stars. This change most likely occurs when Gahanka appears.
Tip: If a player is playing a Temple Guardian, he may speak to the wizard with a green question mark over their head enroute to Gahanka. The question mark will show up as blue on the map, but in-game it is actually green. This quest is done in the same area as The Kobold Chieftain quest, hence the recommendation to do both quests at the same time.
Tip: An alternative to running all the way back from the remote Kobold village is to activate the Resurrection Monument at Sloeford before you set out, and then teleport back using F12 (default) once you've killed the chieftain. <If you have the expansion (Ice and Blood) then you can teleport to any portal at any time anyway, so don't worry about activating the resurrection monolith.>