For millions of years, the world was ruled by dragons. They slowly developed the arcane arts, developed ties to divine magic, and carefully bred the species of the world to best suit their needs.
At first, these creatures were little more than lesser copies of themselves, pretty much resembling dinosaurs and all other manner of reptillian creatures.
Then, a great disaster struck, plunging the world into an ice age. Struggling to survive, the dragons crawled into caverns and lairs to hibernate. When the ice age finally ended, and the dragons all awoke to reclaim their kingdom, they found that the world was now populated by an intriguing new species: man.
Finding man to be a particularily suitable servant race, they quickly set about conquering and enslaving the species. Their new-found slaves proved themselves to be extremely useful, and the Draconic empire was quickly vaulted into a golden age of prosperity. Great monuments, vast wealth, and powerful magic soon flowed throughout the world as never before.
It was then that the Great Plague took hold. Perhaps the dragons, in all their hubris, delved too deep into the arcane arts. Or perhaps they managed to earn the ire of some powerful deity, whose influence seeped into the material world. However it happened, the plague rendered the entire species infertile.
Faced with the extinction of their entire species, the Draconic society devolved into chaos and war. Rival factions sprouted up, each blaming the other for the plague, and bitterly at odds over how and whom should solve it. This was known as Ragnarok, the war that ended the world. The titanic might of the clashing Draconic Legions tore the world asunder, and forever changed the face of the planet.
After centuries of war, and still no closer to a cure than they had been at the beginning, a tenuous truce was called. A war that had been fought over preserving their race had very near destroyed it. With their numbers so diminished, the draconic civilization dissolved entirely as each dragon again burrowed into the earth, each desperately and selfishly seeking to prolong their own existence by hiding themselves from all dangers.
The truce-day marked the beginning of the new calendar for the dragon-spawned races left behind, and many millenia have passed since. Each has carved themselves out a sliver of the once might empire, though man has again shown his incredible adaptivity and once more covers much of the planet.
The Dragons, either through magic or breeding, altered many of the creatures of the world into the races that exist today. Their creations, amongst others, include dragons, orcs, tatsuo (dragonborn), giants, dwarves (and duergar), yuan-ti and lizardfolk. Elves will find their place too, though where exactly they fit in I haven't decided
During Ragnarok the dragons largely split into east/west factions:
In the east, their creations tend more towards imposing their own image onto man, making reptillian-appearing creatures (Trogodytes, Lizardfolk, Yuan-ti, Dragonborn).
In the west, they tended more towards perverting man, creating Orcs and giants.
The western dragons will also likely have created halflings, gnomes, and other humanoid races, while the eastern may have perverted some elves into the gith. Elves will likely have either been an "upper class" of dragon-slaves, or have skirted enslavement entirely (or partially, thus explaining the gith). Dwarves and Dragonborn may pre-date the war, and thus exist in both kingdoms, though may be split (dwarves/duergar, and racial-variety dragonborn).
The overarching theme of the split is that neither side was "evil", and thus none of their creations are intrinsically "evil" either. Morality in this world is composed of varying shades of gray, with each "good" trait tainted by some opposing "evil" trait.
For example, Marduk is the most common name for the god of order and justice. His followers adhere strictly to law and principle, and vigilantly seek to stamp out corruption, criminals, and agents of chaos or disorder. However, they are unwavering and close-minded on how those notions are defined, which almost always leads to prejudice, disproportionate punishment or retribution, and collateral damage. To followers of Marduk, the ends often justify the means, and many injustices are committed in the name of justice.