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The Cult of the Damned is an organization of the living beings who serve the Lich King. Members are mostly Human, but including all races. The Cult was formed during the opening days of the Third War, when the Scourge was loyal to the Burning Legion, and establishing its foothold on Lordaeron. The Lich King Ner'zhul, trapped in his prison-throne, reached out telepathically to men, orcs, and elves who lusted for power - most notably the then-Archmage Kel'Thuzad who would become an Archlich and the leader of the Cult of the Damned.
While Cultists aspire to become Undead, they remain alive because: 1. Undeath is considered an honor one must earn, 2. living beings are useful to the Lich King for their ability to spy in living Horde or Alliance settlements, and recruit powerful individuals from among the living, either into the Cult or the Scourge.
The History of the Cult
After the Lich King Ner'zhul defeated Azjol-Nerub in the War of the Spider, and gained control of Northrend, he turned his attention south, to Kil'jaeden's chosen targets: Quel'thalas and Lordaeron. Though he was trapped bodiless and confined to the Frozen Throne, he could reach out telepathically across great distances to those seeking power and knowledge of necromancy - his first minions, and the beginnings of the Cult of the Damned.
Chief among the men and women who heard the Lich King's call was Kel'Thuzad, archmagus of Dalaran. Forsaking his position as senior member of the Kirin Tor, Dalaran's ruling council, Kel'thuzad traveled alone to Northrend. The vast Nerubian ruins left decimated by the War of the Spider confirmed his desire to ally with the Lich King. His arrival was expected, and he offered his soul to The Lich King Ner'zhul. In exchange for loyalty and obedience, Kel'Thuzad was promised immortality and power, but he remained a mortal human for his appointed task: the organization of the Cult of the Damned, which would set the stage for the Scourge's conquest of Lordaeron. The Archmagus was old, but still very charismatic, a useful trait for amassing more and more of Lordaeron's easily-swayed citizens under the shadow of the Lich King.
For three years Kel'Thuzad worked, preaching his new religion to the masses, promising them immortality and an ideal society free of all the burdens the existing one forced upon its citizenry. Many of Lordaeron's overworked laborers and disenfranchised masses were taken in by this charismatic individual, and willingly sold themselves into service to the Lich King. Kel'Thuzad also used his fortunes and those of his fellow Cult members to taint and corrupt men in positions of power, bringing them into the Cult through favors and gifts. Eventually, many of Lordaeron's northern towns were completely under the control of the Cult of the Damned and so, it became time for the Lich King to act.
Plague Cauldrons, artifacts which would spread the Blight Plague over wide areas, were created and placed by the Cult of the Damned in the cities they controlled, beginning in the northernmost reaches of the Kingdom of Lordaeron. The plague spread quickly, wiping out the towns' populations and raising them as Scourge. Though this was a horror for an unsuspecting citizen, for a Cultist, undeath was a welcome reward.
When the Burning Legion was defeated at the Battle of Mount Hyjal, the Alliance and Horde were not the only winners. The Cult of the Damned considered the demons’ defeat a victory for the Scourge as well. the Lich King was finally freed from their control and could begin furthering his own plans using his powerful death knight, Arthas Menethil. He already had the greater part of Lordaeron under his control, and he wished to expand his influence. The Cult of the Damned rejoiced in the release of its leader and continues to serve him, not the Burning Legion, after the war.
When Arthas shattered the Lich King's prison and took on the Helm of Domination and the spirit of Ner’zhul, he created and became what was believed to be the strongest being in the world. The new Lich King not only had the telepathic power of the imprisoned Ner'zhul, but an immensely powerful and mobile avatar in Arthas. The Cult simply vowed to serve this new entity as it did the old, as long as he furthered the efforts of the Scourge. The Cult works itself into a frenzy with the thought he may leave his new home in Northrend and grace Lordaeron with his presence some day. Working beside the undead, delving into the dark magic of necromancy, and striving one day to become undead themselves, the Cult of the Damned is truly a frightening organization.
The base of operations of the Cult of the Damned is Stratholme, and its leader is Kel'Thuzad. Kel'Thuzad takes orders from the Lich King himself, and orchestrates the spread of the Scourge. His two closest living lieutenants are referred to as simply "Next In Line", and are raised as shades and replaced periodically. These leaders serve the Lich King without question, seeing undeath as the ultimate reward. Under the Next In Line, the Cult of the Damned appears to run with little rhyme or reason, but the (apparent) chaos serves the group’s purpose - individual leaders cannot be picked out and targeted. Underneath the chaos is a tightly run operation with mortals dedicated to the study of dark magic, the conscription of new mortal members and undercover scouting for the Scourge’s forces.
The Cult is situated mostly in the Plaguelands and, to a lesser extent, in the rest of Lordaeron, always extending the Scourge’s sphere of control. The Cult will often be found wherever the Scourge is. 
The Cult of the Damned is not a military organization. It is an arm of the Scourge, and the Scourge has other methods of waging war. However, the cult contributes a pair of special weapons: necromancers and blightweavers. Their dark rites support the cult, bringing curses on their enemies and raising new legions of undead.
On the battlefield, they are scavengers, using spells to bring their dead enemies under their control before the carrion birds can get to them, gathering large undead forces and directing them at key targets chosen by their Scourge commanders.
Death comes in many forms — and it’s the job of the blightweaver to make sure that death comes in as terrible a form as possible. These tinkers of the vile concoct new poisons and breed new diseases, hoping to discover new plagues that will extend the Scourge’s terror to every corner of Azeroth.
On the battlefield, the Scourge occasionally employs blightweavers as sappers of life; instead of sending teams of goblins to destroy a wall with a burst of explosives, they send these vile priests out to destroy a populace with an explosion of disease and poison. They sneak into a town while the battle rages elsewhere, plant plague animals in stables, and poison wells.
While the current members of the Cult of the Damned are zealous individuals wholly dedicated to their cause, most new recruits are shy and weak-willed people unsure of themselves. Unpopular, abused people, often considered failures in their careers or their lives in general, are ripe for the manipulation of the Scourge as they don’t have much to hold onto in the first place. With the promise of wealth, power, knowledge — whatever will motivate them — the Cult draws them in. When the mortals commit to the Cult, they are forced to drink a concoction that steals their will and enslaves them forever to the Lich King, to help them with the final act of submission. Afterwords, they are given an Orb of Illusion, used to disguise a cult member, allowing them to gain safe passage, infiltrate, or simply blend in with an enemy, and are confident and in the full sway of the Lich King’s powers, ready to work tirelessly to spread the will of the Scourge. Members view the Scourge with envious fascination, and many felt this way before any dark influences helped convert them. The undead seemingly defy the natural order of things and show limitless potential, for if one can beat death, one can do anything. To be undead is the greatest goal one can have in life. It is considered a reward for a life well lived (according to the Scourge, of course) to be given undeath. There is sometimes a murmur of dissent in the ranks when some feel that their fallen enemies are gifted with undeath undeservedly while cultists must work to receive that divine payment. Such grumblings are often put down quickly, usually with the threat of death with no final reward. The officers in the Cult explain that their enemies die and become allies because their numbers are much greater than the Cult of the Damned. If the Scourge only raised deserving mortals, it would not be the great force it is today. The Scourge needs the Cult because they need mortals to serve them.
Kel’Thuzad personally appoints officials and leaders for the Cult, looking for people both talented in espionage and in pursuing the dark art of necromancy. Good leadership abilities, a talent for recruitment and the ability to blend in with normal mortals are also valued skills. It is impossible to reach any officer ranks without magic, however. There are no ranking members of the Cult who do not know at least a handful of dark spells.
In World of Warcraft
This section concerns content exclusive to World of Warcraft.
The current activities of the Cult of the Damned are unknown. While the cult is certainly still active, spreading its influence among both the Horde and Alliance, its true objective is hidden, the Lich King's next move has yet to be revealed. What we do know is that the Cult will never tire in its mission to undermine the defenses of the living races through subterfuge and sabotage. So long as the Lich King remains, the hidden hand of the Cult will be an ever-present threat to both the Horde and the Alliance. As the only living humanoid boss in Naxxramas, Grand Widow Faerlina is likely a high-ranked member of the cult. Other members include Maleki the Pallid, leader of the mortal Thuzadin in Stratholme.
The Cult of the Damned makes a strong comeback in Wrath of the Lich King, and have managed to infect many villages with the Undead Plague, including the Magmothran magnataur in Borean Tundra, the Alliance town of Farshire, the horde farms north of Warsong Hold, and have inflitrated both Faction's main towns within Borean Tundra.
The Cult of the Damned trains, practices, and kills within Icecrown, mostly upon the gigantic series of gates the Lich King built for fortification.
Future of the Cult
Because of the new leadership (Bolvar Fordragon) of the Scourge, it is unknown if the Cult will continue to exist or be dismantled, or possibly break all ties with the Scourge. Many of the Damned seem to throw their lot in the ranks of Twilight's Hammer.