They were probably removed because they didn't fit the style of a game like Mount&Blade, or they may have feared the gruesome looking corpses would have turned away potential players. The undead and other odd fantasy creatures were removed from the game as of 2005. They did have pale cloudy blue eyes, despite the rotting muscle. The appearance of the undead consisted of exposed body muscle and a big hole in the stomach where the intestines should be.
Proof of their existence can be found in four BRF files called 'undeadbody' found in the Mount&Blade CommonRes, bodymeshes.brf, and an undead head. The undead are hostile storyline characters featured in version 0.202 of Mount&Blade, then called Warrider. Undead are a faction and finished graphics that were not included in the final game, similar in the scripts/code to the Ghouls (also removed). Found in Mount&Blade\CommonRes\body_meshes.brf
