Cannibal hillbilly dwarves!

Perhaps there are some names floating around on artifacts of their culture that- while structurally sound Dwarven, just don't sound right...more...Orcish- Boneforge, Marrowspoon, Skullmace, Mithriltooth.

Perhaps one is their guide or primary source of info... (whether he is reformed or not is for YOU to know).
 

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I think you are going to have a problem.

Cannibalistic Hillbilly Dwarves = Goblins

And, well, most players have learned not to be afraid of that. Indeed, the whole trope is usually played for laughs, with Irish hill folk being one of those racial groups you are still allowed to laugh at and sterotype (Lousiana Cajuns being another). So, you're waging a pretty much uphill battle here to make scary a trope that has long ago become a comedy reutine.

My personal preference would be to change over the sterotype to Radioactive Mutant Dwarf Ghouls, because Zombies still have a little bit of horror left in them though movies like Zombieland are showing that even this trope has become too familiar to maintain real horror.

So maybe Radioactive Mutant Dwarf Great Old One worshippers might work better, with just a few more Lovecraftian ghouls thrown in. That is to say, I'd go not for a human sterotype, but rather dwarves as a chtonic race, and play up the strangeness of that.
 
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Cannibalistic Hillbilly Dwarves = Goblins

I was thinking more like Cannibalistic Hillbilly Dwarves = H.G. Wells' Moorlocks from The Time Machine (With Elves conveniently becoming the Eloi...)

They still have their machinery, but it's all turned to harvesting surface races for fodder & slaves. The "hillbilly" aspect comes in in that their machinery is ancient and degraded by Dwarven standards- there has been no innovation in generations.

The leathers, the fats for candles & lamp oils, and so forth- all derived from their kills.

Bone gets used for all kinds of things:

Industrial Uses of Bone - bones, oil, fat, glue and treated
 

At no point call them dwarves. Don't call them anything at all. Describe them, but never give a title for their race. When they talk to each other, or to outsiders, have them call each other 'my flesh' and everyone else food.

And I'd also show them as little as possible. The less the characters/players get to see, the more they have to use their own imagination.

When they fight have them use things which obscure visibility. Traps which fill the passages with blood red powder. Have them carry storm lanterns that only shine forwards obscuring themselves. Dimly lit corridors, tight passages with arrow slits. And then if you have a final battle, after they've already been seen multiple times, have it be the opposite. A vast open well lit battleground where they suddenly fight with light and fire based things, the walls decorated with trophies and weird things.
 

Not to derail the thread, but when I first saw this title, the only thing that came to mind was that this was the title of the next "original made for Syfy" Saturday night movie. Somehow, it just seem to fit. :D
 

I was thinking more like Cannibalistic Hillbilly Dwarves = H.G. Wells' Moorlocks from The Time Machine (With Elves conveniently becoming the Eloi...)

Yeah, well Morlock also equals goblin. And as for your elves as Eloi conception, it may be that elves in some sense inspired Eloi in the first place. The fey connection to the Sylvan and the horrid appearance of the Cthonic races are by no means recent archetypes. They influence just about every conception of the alien, so that - whether the result of conscious archetype dipping or not - the result is Vulcan = Elf and Klingon = Orc.

Machinery is also 'goblin' in nature. Consider Tolkien's cannonical description:

Now goblins are cruel, wicked, and bad-hearted. They make no beautiful things, but they make many clever ones. They can tunnel and mine as well as any but the most skilled dwarves, when they take the trouble, though they are usually untidy and dirty. Hammers, axes, swords, daggers, pickaxes, tongs, and also instruments of torture, they make very well, or get other people to make to their design, prisoners and slaves that have to work till they die for want of air and light. It is not unlikely that they invented some of the machines that have since troubled the world, especially the ingenious devices for killing large numbers of people at once, for wheels and engines and explosions always delighted them
- The Hobbit

Consider also their appearance in 'World of Warcraft', where not coincidently, they are also played for laughs.

I think it will take heroic effort to make an ugly degenerate dwarf the object of fear. I think you might end up with Cannibalistic Gully Dwarves at best.

I recognize that this is a departure from your conception, but I think I'd rather be going toward that best ideas of the dour compassionless Duergar combined with the best ideas of the Warhammer Chaos Dwarves, and meld them together in some sort of cthonic 'great old one' worshipping cult, possibly modeled after either the cthonians (Shudde M'ell?), or Abhoth, or Byatis, or Tsathoggua.

Mechanically, I'd introduce anarchic energy taint, and some sort of stone that the dwarves had tunneled into. Essentially, this would be identical in nature to radiation of the fantastic sort, and once the PC's had been exposed to enough to recieve a dose, various effects would begin to occur: sickness, mutation, weakness, etc. Different areas would have different rates of exposure. The mining of this radioactive stone, and the utilization of it in monsterous machines of various sorts would be their principal occupation. The dwarves themselves would employ monsterously mutated versions of themselves as shock troops (I'd probably base this somewhat on the old hordling table in the 1e MM2), while those that had mutated mentally into 'psionic' dwarves ruled over them. The central trait of these creatures would be their coldness, hard-heartedness, and pitilessness. I would have them attack in eerie silence, never being induced to speak, never answering any complaint or petition, never even showing kindness, warmness, or tenderness to their fellows or indeed concern of any sort.

I think 'decrepid decayed byzantine society' you might be able to pull off as a source of horror. I think 'redneck' will only manage dark comedy.

The leathers, the fats for candles & lamp oils, and so forth- all derived from their kills.

The Duergar deity Abbathor does this. If you want to introduce some Gygaxian tension to the setting, there could be a sect of the dwarves that still follow the old ways of Abbathor and Laduguer and who strive to remain free of the chaotic taint that has overwhelmed their fellows.
 

I'm actually using derro physical descriptions -- with malnuitrion symptoms layered atop that -- for their appearance and stats. I am calling them dwarves, since one of the player characters is technically a fifth or sixth cousin, since he's from their same clan, several generations back, underscoring how far they've fallen in only a few years because of something deeper in the dungeon.

The "hillbilly" thing is actually a general thing for the local dwarves, who are more Appalachian than they are Germanic or Scandanavian or Scottish, complete with the music they listen to, the foods they eat, their dances, etc. (The party had to disable a floor pressure plate trap by performing a version of the Virginia Reel to cross the floor, for instance.) The exiled dwarves keep hound dogs, play fiddles and make moonshine, etc. It's not played for laughs, any more than dwarves typically are. (They still like to drink and fight, for instance.)
 

Some scenes of the dwarves in question (it's a play by post game):

A figure emerges from the north side of the eastern passageway, shielding his eyes from the light of the group's magical weapons, and crab walks cautiously toward the keg on bowed legs.

He's a dwarf, it seems, but he doesn't look much like Emus. The figure's almost bald skull is emaciated, with his almost transluscent flesh hugging the bones tightly. Only a few wisps of colorless hair dot his scalp and his beard is similarly patchy.

His skin is covered in bruises and appears to be partially covered in a rash of some sort.

He wears no shoes and Hazel notices that the dwarf's toenails appear to have all fallen out. His clothes are filthy and tattered and stained with blood. His weapons, though, appear to be in good condition, and Emus recognizes the short sword and crossbow as the same sort of heirlooms he's seen Glangirn's exiles proudly displaying in their homes, albeit in much better condition.
"Nooooooo," the figure says, shaking his head, still shielding his eyes from the light. At this distance, the group can see that his gums are pale and bloodless. "The king is in his chamber, safe from assassins. Give me the keg."
As the first dwarf steps back into the shadows, the second speaker begins chanting a word in Dwarvish: "Klosfrul."

Soon, other voices along the eastern end of the corridor pick it up: "Klosfrul, klosfrul, klosfrul, klosfrul, klosfrul."

There's the sound of metal being banged together as the chanting grows in volume.
"They're chanting 'meat,' Father. Captain, if we move back into the storeroom, we can use the doorway as a bottleneck. Fer these ones in this hallway, at least.

"We still ain't recovered from the fight with the dragon toads."

Emus gives Hazel another wand hit.
(Specifically, it means "freshly killed meat.")
The light from Tucker's sword reveals at least six pairs of reflective eyes in the darkness, spread out evenly across the eastern hallway, and moving toward the group.

"Klosfrul, klosfrul, klosfrul, klosfrul, klosfrul!"
As the group backs away, there are the sounds of taut strings releasing and crossbow bolts clatter around the group in the dim light.

"Klosfrul, klosfrul, klosfrul, klosfrul, klosfrul!"
 

Well, sounds like you've already got an idea about your cannibals being somewhat civilized. My only suggestion, which was hinted at by others is to throw in an actual undead. Whatever is appropriate for the party level, which the dwarves haven't been able to deal with, maybe it's "crazy Uncle Elrock" or that is sneaky enough they haven't noticed when their own supplies get eaten up earlier than expected.
 

I thought about having them turning into ghouls, but the party paladin -- the "Father" that Emus referred to -- had a big solo adventure in a ghoul necropolis recently. Maybe I should look into the wendigo legends and various templates. Good thought, Wycen!
 

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