mlp,
I think the book Breaking the Vicious Cycle has a very good description of what happens when the villi are blunted. Ryan has blunted villi also and has a hard time gaining weight and absorption. Here's a brief of what the book says.....
The villi are finger-like projections in the intestines responsible for absorbing nutrients. They also produce enzymes that break down sugars. They can become damaged from prolonged diarrhea, bacterial overgrowth, antibiotics, lack of stomach acid, or various disease states. (Celiac disease is not the only disorder that damages these villi.) When the villi are damaged, they can no longer produce disaccharidases, the enzymes necessary for breaking down disaccharides (double sugars such as lactose found in milk, sucrose found in common table sugar, or disaccharides resulting from the breakdown of starches) into monosaccharides that can then be absorbed.
The undigested sugars remain in the intestinal tract and get consumed by bacteria, which produce waste products, proliferate, and may migrate from the colon into the small intestine. The waste products damage the intestinal tract and can cause the production of mucous to protect the digestive tract. The mucous then forms a barrier between the ingested sugars and the enzymes secreted from the villi. Thus a vicious cycle occurs.