"Necropolis towns are overrun and ruled by undead creatures. They are the natural bases for the Necromancer and Death Knight hero types. Necropolis armies have many units with abilities to weaken their opponents. This quickly gives them an edge over equal or even more powerful enemy armies." RoE manual
Necropolis is one of the most powerful towns. It has very strong 4th and 6th level creatures, as well as mighty shooters. Vampire Lords and Dread Knights are among the strongest in their respective levels, and while having Power Liches in an army consisting of living creatures may have problematic because of the death cloud attack, in the army of undead it is an advantage. Skeletons are around average rank of 1st level creatures, but due to Necromancy secondary skill, their numbers can be signifcantly greater than other 1st level creatures. The downside is, that Walking Deads, Wights, and Bone Dragons are all among the weakest creatures of their respective levels. In fact, Bone Dragon is perhaps the weakest 7th level creature.
Bone Dragons and Ghost Dragons are underrated. Their -1 to enemy morale means that neutral mobs except for Minotaurs will never get an extra turn in battle, which gives the Necromancer greater control of the battlefield, reducing losses over time, and eventually resulting in a larger, stronger army. When upgraded to Ghost Dragons, they become faster than all units below level 7, allowing the Necromancer to cast the first spell unless the opponent has a Firebird/Phoenix or an upgraded Black Dragon, Gold Dragon, Arch Angel, or Arch Devil. The Ghost Dragon's aging attack is useless in small battles, but is terrifying in huge battles when split into 3 stacks and used to age the opponent's best stacks.
Necropolis has excellent magic capabilities. It can build level 5th Mage Guild and has few special spells like Animate Dead and Death Ripple to support the armies. Also, undead hordes are immune to mind spells, which greatest advantage is that they cannot be blinded or "berserked". In addition, undead do not suffer from negative morale (nor do they benefit from positive). This makes the Spirit of Oppression a useful tool for Necropolis armies.
Perhaps the most outstanding feature closely related to Necropolis is Necromancysecondary skill. It enables heroes with the skill to "harvest" Skeletons (or Skeleton Warriors) from enemy armies as well as allied creatures. It is possible for a hero with Necromancy skill to come out from a battle with more troops than he went to it.
An advantageous tactics with Necropolis is "harvesting" skeletons with the Necromancysecondary skill. At expert level Necromancy allows 30% (15% in Horn of the Abyss) of the creatures killed in combat to be brought back from the dead as skeletons. The percentage points can be increased with two structures: Necromancy Amplifier(s) and Soul Prison. Amplifiers can typicallly be constructed in necropolis towns, while Soul Prison is the grail building of Necropolis. Each amplifier increases the percentage points by +10% (5% in Horn of the Abyss).
There are also artifacts that can increase the skill: Amulet of the Undertaker increases the percentage points by +5% (2.5% in Horn of the Abyss), Vampire's Cowl by +10% (5% in Horn of the Abyss) and Dead Man's Boots by +15% (7.5% in Horn of the Abyss). The artifacts combine to the Cloak of the Undead King which gives another +30% (15% in Horn of the Abyss) to the Necromancy skill. With these artifacts and one amplifier, the Necromancy secondary skill can be increased to 100% (50% in Horn of the Abyss). Additionally, two heroes specialize in Necromancy, Isra and Vidomina. Combining either of them with one amplifier and all three artifacts, it is possible in Horn of the Abyss to reach 100% skill level in necromancy at level 67, which means that possibly all the creatures killed in combat will be brought back as skeletons.
Harvesting leads to a situation, where it is profitable for heroes with Necromancy (mainly Death Knights and Necromancers) to carry through combats with wandering creatures instead of letting them flee if they are substantially less creatures and want to quit the battlefield. So, special months (see growth) where some creature types population doubles is actually a boon for Necropolis skeleton harvesters. This is especially valid for low-level creatures that come in large numbers, like hobgoblins. Random units blocking pathways on the map thus become a motivational boost because those wandering creatures mean additional Skeletons.
Even without necromancy, you can turn any creature into Skeletons. This means that free level 1 map dwelling (like for Gremlins and Imps) will give you free skeletons indirectly, thanks to the Skeleton Transformer. That means you don't even need wandering enemies or the Necromancy secondary skill to raise huge hordes of skeletons as the Necropolis, and outnumber other towns.
Pros:
A variety of good heroes to choose from.
A variety of strategies available.
Units are unaffected by negative Morale thus unaffected also by Sorrow or Spirit of Oppression, mixing with other Town type units still has a penalty on units of other towns.
Necromancy is a powerful secondary skill that only Necropolis town heroes can utilize effectively and that every Necropolis hero typically has. Given affordable Necromancy amplifier buildings (10% point building bonus to Necromancy, unique town secondary skill boost building feature for all own heroes on the map, safe the Navigation centric building Lighthouse the only secondary skill bonus enhancer building available in the game) in Necropolis towns and a range of artifacts that further enhance the skill percentage like Vampire's Cowl it is rather easy to recruit a small but steady number of Undead from most other creatures after fights. Every successful fight will increase the number of level 1 units one has even to astronomical amounts of stack sizes for steady motivation boosts after each encounter. Undead generally are Animate Dead resurrectable during combat additionally and the Skeleton Transformer in a Necropolis town can change foreign units to Skeletons so mixing foreign units with Necropolis town units does not make them suffer morale penalty when converting them to Skeletons first, one can recruit units off fights with the opponent and they are rather hard to kill and easily replenished given enough mana or Necromancy skill bonus points which are readily available via buildings or artifacts or even hero specials.
Vampire Lords are by far the most cost-efficient level 4 unit (and arguably the most cost-efficient unit in the game), as they can beat armies of much greater size as long as they are not (like Undead, Constructs or Elementals) immune to the Vampire Lords' Life drain ability and as long as the Vampire Lords are used properly (with Blind on extra enemy stacks for example or Counterstrike on the Vampire Lords amidst low number/low hp enemy stacks, alternated with Animate Dead to help out if the Life Drain to damage inbound ratio is proving destructive to the Vampire Lord stack - perhaps also using Haste and the Flying feature of the Vampire Lords to switch opponent melee stacks to feasible ones or to seek a safe point to replenish via Animate Dead, Cure or First Aid).
The level 3 spell Animate Dead (which the necromancer hero Thant has built in) can resurrect units in combat, and they stay resurrected after combat. So given a good balance of Thants undead and repairable units compared to the opponent, enough mana for the resurrects and having Shackles of War for unlimited turns (a smaller version would be using Blind on all remaining enemy units and killing one blinded stack each turn, keeping the enemy locked until the enemy hero is lost to the opponent and the artifacts if any are transferred) he would not lose any units in combat but also often get additional Necromancy created skeletons (which would hamper movement on the adventure map a little, as Skeletons are slow creatures (and even with Town Portal and Dimension Door there's an adventure map movement penalty to consider)).
There are number of artifacts that are only useful to Necropolis (artifacts enhancing the created creature number of the unique secondary skill Necromancy like Cloak of the Undead King, but also Pendant of Death which counters the mini, undead-only version of Armageddon, damaging all undead on the battlefield, even those recruited in no Necropolis but on the adventure map).
Both Necropolis hero types begin with a spell book.
Cons:
Necropolis produces the least amount of units per week. (Not counting Necromancy).
Unaffected by positive Morale. Mixing creatures of other town types without converting them to Skeletons via Skeleton Transformer first will get them negative Morale of course, on the other hand Spirit of Oppression is a very nice thing to have for any Necropolis hero with only Necropolis units in the party as it does not do any harm to Necropolis units. The Dread Knights' Death blow feature works largely (no Luck bonus for the second strike) like an attack only, no movement Morale bonus would, but at a higher probability of 20% (high Morale has 12.5% of activating a second action each creature) and it is a natural feature.
Difficulties in the early game, where your slow level 1 and level 2 creatures are not the best to conquer mines and explore the map (and in the endgame a host of in-combat resurrectable skeletons might hamper adventure map transfers (to re-flag buildings for instance) safe for Town Portal which is a nice (and often banned) spell to jump the adventure map)).
Bone and Ghost Dragons are near the bottom of the Level 7's in strength and usefulness.
Necropolis heroes cannot learn first aid, even though their blacksmith produces first aid tents.
Armageddon spell is in the Mage Guild, but is useless for Necropolis units since the undead don't have fire magic immunity. Moreover, a Rampart, Inferno, Dungeon, or Conflux hero may capture a Necropolis and learn Armageddon, which will be used in a proper way via dragogeddon.
This town is often considered too strong and thus is banned in many multiplayer games/tournaments. In Horn of the Abyss, all percentages for Necromancy got halved in an attempt to balance this and also Galthran got replaced by Ranloo.
Some thoughts
If you can upgrade your Estate early, you should do so. The Vampire Lords are one of the best 4th-level creatures in the game. Since they draw life from their enemy, and resurrect themselves, they can be used to single-handedly take out large numbers of low-level creatures. Combine with "counterstrike" to get even better effect.
"The month of the Hobgoblin" and the like are Necromancers' wet dream. Just take your strongest hero and stockpile Skeletons. Necromancy adds a little bit of motivation on clearing maps - who needs experience and levelups, when there's Skeletons aplenty?
You get Skeleton Warriors only if your ranks are full at the *end* of combat and if you have a stack of Skeleton Warriors and no stack of Skeletons. The downpart is that you get less than if you'd get normal Skeletons (2/3rds as many). Therefore, if it is logistically managable, it would be better to try and get a horde of normal Skeletons first, and then upgrade them at a Necropolis or Hill Fort for the last battle.
If there are any Level 1 dwellings nearby, recruit them and take them to the Necropolis. If you have a Skeleton Transformer, you're practically getting free skeletons, and even free Skeleton warriors if there is a Hill Fort close by too.
Castle
Rampart
Tower
Inferno
Necropolis
Dungeon
Stronghold
Fortress
Conflux 
Cove 
Factory 
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Skeleton
Skeleton Warrior
Walking Dead
Zombie
Wight
Wraith
Vampire
Vampire Lord
Lich
Power Lich
Black Knight
Dread Knight
Bone Dragon
Ghost Dragon
Leadership, 
First Aid and 
Estates are not available for Death Knights.
Interference