Shortly after your character reaches level 3 you will receive a letter from Princess Morgiah of Wayrest, which may appear mysteriously in your inventory. She will tell you to come and see her in Wayrest for information regarding the Emperor's letter. When you meet Morgiah she will agree to tell you what she knows about the missing letter IF you will do her a favor (get used to this, everybody wants you to do something for them before they will help you). She wants you to take a note to the King of Worms in Scourg Barrow, and return with his reply.
She will mark Scourg Barrow on your map, in the Dragontail Mountains. It will be very useful if you have the spell Invisibility in your Grimwoir (magic spellbook). You will have to go through a room that contains two zombies, and at this stage of the game they will be very difficult to defeat if they attack.
Cast a recall spell as soon as you enter Scourg Barrow (or before you leave Wayrest).
The first room you enter in Scourg Barrow is lined with coffins. Open the second coffin to your left as you enter, and jump in. Follow the corridor until you reach a set of stairs going down, and cast the spell invisibility (the room at the bottom of the stairs contains two zombies). Now walk down the stairs, open the door and take the first door to your left. Follow the corridor to another door, go through and turn left at the "T". Now turn right and follow the corridor into a cave. Turn right at the first opening, then turn left at the next intersection. The King of Worms is in a room behind the door you are now facing. Give him Morgiah's note and he will give you another note to deliver to Morgiah.
Be sure to read Morgiah's note, and the reply; this will give you a glimpse of the plot to the sequel of this game. When you return to Morgiah with the reply, she will tell you that Gortwog, the warlord of the Orcs has the letter, but that you will need to seek information from Mynisera, the Queen Mother of Daggerfall. She warns that you will need to first speak to someone "of a lower station" rather than speaking directly with the Queen Mother.