The Imperial Library

After you retrieve the painting from Castle Wayrest, you receive another action quest from a rather unlikely party - Underking. They want your aid against their eternal (pun intended) enemy - the Necromancers. As your employer explains, the Necromancers have stolen a magic item (the item varies) from Underking's gang, cursed it and gave it to the Blades. According to the guy, ...the Blades were once the honor guard for Tiber Septim. Today they are loyal to the empire and Tiber's code, but not always to the current emperor. The Underking has reason to not wish harm upon the Blades.

Interfaction relationships aside, you should infiltrate Castle Llugwych in Ykalon, and take that item, whatever it is, back. 

Underking's ingame portrait?

While you will surely converse with Underking's agents, don't hope to see the Undead Guy himself - as far as I know, Underking is not featured anywhere in the game in person. However! In the Daggerfall directory, there's an image of some dead-looking person, and many knowledgeable people insist that it was originally intended to be Underking's face. No insider input on this issue has been obtained so far, if you know what I mean.

In might be worth noting that the agents of the Necromancers that attack you throughout this quest always mention King of Worms and that he's not happy. Not that there ever was any doubt about the identity of the lead Necromancer...

Like I said earlier, it's an action quest for the most part. When you retrieve the quest item and bring it where it belongs, the outcome it surely disappointing - the guy un-curses the item and gives it... back to you. And tells you the following:

Not even death can hide a true descendant of Tiber Septim from the Underking. King Lysandus did not die in the battle of Cryngaine. He was slain by treachery before it. The monument to him in Hammerfell is an empty tomb. His remains were secretly taken to an ancient tomb in Menevia, which I will now reveal to you. I do not know who betrayed Lysandus, nor why his spirit haunts the city of Daggerfall and not the battlefield of Cryngaine. I have kept my part of the bargain, and you have earned the gratitude of the Underking.

What the hell was the "true descendant" bit about? No idea. Are they impying that Lysandus was the true descendant of Tiber Septim and Underking got a chance to question him postmortem?

On the positive side, now we know where's Lysandus' true tomb is located. Now gotta do something with that knowledge.