First off, there's little to win in proving that your group is wrong about Monks or something like that. If your group is happy how they're playing, then I don't think it's a good idea to show them another way of playing that they likely won't enjoy.
With that said, here's how Kobolds break.
First off, with Dragonwrought they become dragons. Because the definition of a True Dragon is one who has 12 age categories (see Dragon Magic, Dragons of Kyrnn, and Draconomicon), and because Kobolds have said age categories (see Races of the Dragon) a Dragonwrought Kobold can use any one of the Sovereign Archtypes from Dragons of Eberron. This includes getting +2 levels of Sorcerer casting or one bonus feat every 4 levels. They only cost is that you can't take any other archtypes... which is amazing. Other options include adding all Cleric or Druid spells to your arcane casting (making Warmages, Dread Necromancers, and Beguilers amazing) or getting some handy item creation abilities.
Second, they can be venerable without penalties (from the same table that gives age categories in Races of the Dragon) which gives them +3 to all mental stats. Nifty.
Third, all dragons of old age or older are able to take Epic feats without regard for their HD. Venerable Dragonwrought Kobolds count. With that said, this isn't a huge deal... most good epic feats require too many skill ranks to be available early anyway. But +30 hp at level one (Epic Toughness) is pretty awesome.
But wait, there's more. The Greater Draconic Ritual from the online expansion gives them +1 level of Sorcerer casting (yeah, this stacks with Loredrake's +2 sorcerer levels) at a cost of 4hp, 1,100gp, and one feat (you also get the ability to cast any one Sorcerer 1st level spell as a spell like abilities 3/day... Identify is the best choice since that means you don't have to pay 100gp per casting). You can do this at level 6, meaning a 6th level Kobold Sorcerer could cast like a 9th level Sorcerer, including 4th level spells.
If you go the Sorcerer route, then the best blast spell in the game is available to you in the form of Wings of Flurry in Races of the Dragon. 1d6 force damage per caster level to all targets you designate within 30' of you (so it won't hit friendlies), reflex save for half, and if they fail the save they're unable to act for a round. Nice. Bonus: +1 caster level free if you're a dragon (or dragonblooded).
Anyway, the point is that by combining abilities from a few different books, Kobolds become incredible Sorcerers, Warmages, Beguilers, or Dread Necromancers. They're not half bad in other roles either mostly because the option of taking a ton of free feats helps pretty much anyone.
JaronK