Dr. Krackpot (the insane genius riding the giant mechanical legs) was originally going to be a boss character for the game. When the player reached Dr. Krackpot's lab, Krackpot's latest creation, Krankenstein, would get up from the lab table it was strapped to and begin to attack the player. Once it was defeated, Dr. Krackpot would have attacked the player himself. For whatever reason, this boss battle was cut.
Baron von Ghoul was originally conceived as a menacing, evil character, who would turn into a fiery demon at the end of the game. One of the artists working on the game thought that this was rather generic, and instead sketched the Baron in a home-made plane. It was at this point that Baron von Ghoul evolved into the World War II plane-obsessed lunatic that he is today.
The Red Snake seen in the unlockable "Missing in Action" page that shows unused characters actually did make it into the game. He can be seen in the Mansion's Walled Garden as a fountain with one of the Baron's prisoners stuck in his mouth.
Other characters weren't so lucky - they were going to turn up in a "Museum" room in the Mansion and complain about how they weren't in the main game when the player approached them, but this room got cut out too.
The sign seen in the storybook opening currently reads "Ghoulsville in the Gloom". Originally, it read "Neede in the Nuts", which was to be the title of the sequel if one was ever made. However, Microsoft didn't like the sign, so it had to be changed.
Grabbed by the Ghoulies began life as a Nintendo GameCube title, but was converted over to the Xbox during its development cycle. References to "Dolphin interface" can still be found in the game code.
The game began life as a name before anything else. The developers came up with the name as a title for a game, and then decided to create a game from that title. Most games are created with a concept first, then get a finalized name later in the design process.
This was Rare's first Xbox title.
As per usual for Rare games there are many references to previous games.
1) The title sequence has images from 20 year old Spectrum games.
2) Games Room has lots of posters from 8-bit games when Rare were called Ultimate
3) Pictures and statues and paintings of other games character abound, including Banjo and Kazooie and the skeleton witch doctor. Also paintings of Jiggies and a Hive outside the Cottage.
4) Bag of flour has Established 1984 written on the site. References the start of Ultimate and also a power up from Donkey Kong 64.
5) Fire imps appear in Conker's Bad Fur Day.
6) There are some very similar musical themes to those appearing in Banjo Kazooie. One level as the bear and bird exploring a haunted house with ghost infested painting and living furniture. It could be argued that Grabbed the Ghoulies is an expansion of that very level.
In the U.K., Ghoulies means testicles