Undead creatures have a long history in fantasy and horror fiction wherein vampires and zombies have long been staples.
The implication of the term "undead" is that the creature is, literally, not dead, but also somehow horrifyingly "not alive" either.
Undead are typically dead things risen from the grave, or whose life has been extended in some evil or unnatural way. In UO, for example, Liches and the related creatures, for example, are undead evil mages or necromancers who were so caught up in their evil work that they did not notice death.
In UO, most but not all Undead creatures are vulnerable to the Undead Slayer weapon or spellbook type.
Undead, along with Demon types, are particularly features in the dungeon Doom. Among the older Dungeons of Sin, they are particularly associated with Deceit and with one level of Covetous. Many Undead creatures are also found in the dungeon Khaldun, which is located only in the Lost Lands of Felucca. Undead are also associated with Bedlam in Malas, the academy of Necromancy that was overrun by its own foul creations.
Most of the Undead creatures spawn in The Lands of the Lich and the Skeletal Dragon mini-champs of the Stygian Abyss Dungeon. Some parts of the Underworld are also still under Undead invasion. Many lower-level Undead are typically found around graveyards, though sometimes middle-level Undead such as liches are also located in those places.
There are several forms of Undead creatures in UO, ranging from ghostly creatures such as Ghouls (the "ghostly" undead are mostly fairly easy fights) to a more humanoid style (Rotting Corpses, Liches, Lich Lords for example). The humanoid style undead, while it contains fairly easy creatures such as Zombies, also contains the extremely powerful Ancient Lich.
Player Character (PC) Necromancers, along with certain monster or NPC Necromancers, have a limited ability to create undead from monster corpses, who then "dumbly" flail about attacking eligible targets more-or-less indiscriminately.