What is the story behind them they what. How will we ever know

http://www.gamesas.com/bgsforums/index.php?showtopic=773263 any of the countless threads on this topic.

Brief summary: they were a race of elves who moved out of the old elf homeland and settled around Red Mountain. There they discovered (or perhaps they had already surmised the location somehow) the Heart of Lorkhan- the Daedra (or aedra, depending on who you asked) Prince who convinced a bunch of his buddies to chip in and do something crazy and actually try their hands at 'creation.'

Lorkhan's heart somehow fell to the world they all created and, being bound to the world, and to, you know, a god, it was charged with all sorts of Mojo, which the Dwemer for long and forever tried to figure out how to best make use of.

The Dwemer rejected the idea that the deadra (the aedra also, presumably) were in any way somehow "better" than they were. Unlike most other races, the Dwemer made prolific use of science and engineering. Their cities run on mostly steam and geothermal power and are still going strong after thousands of years.

The Dwemer were often at odds with the Chimer (who would later become the Dunmer) when the Chimer showed up, following their prophet Veloth to the same lands the Dwemer had already settled. There was a lot of skirmishes and hatred between the two.

Eventually though, pesky human Nords started showing up and raiding their lands, and to fight this newfound threat, a Chimer leader named Nerevar showed up and made peace with the Dunmer King Dumac and they fought off the invading Nords.

Not everyobne was happy with this tag-team though. One Dwemer faction, The Rorken (sp?) moaned and whined about it, finally causing Dumac to say- "you know what? Shut up." Then Dumac supposedly threw the great hammer Velndrung (sp?) and said "Wherever that Hammer falls- you can live there. Now go away." The hammer flew all the way across the continent, landing in what is now known as- tada- Hammerfell.

Peace lasted between the Chimer and Dwemer for a couple centuries, but when the Chimer learned that the Dwemer not only had the heart of a God in their possession, but were planning to use it. A. The Chimer were fiercely against necromancy, B. The Dwemer were going to do necromancy on a GOD and C. by making themselves immortal and building their own personal, walking, talking God that answers directly to them- well, how could the Chimer stand up to that? The honest truth is, beyond actually building their own God, nobody really knows exactly what the Dwemer were up to, but the Chimer understood that it would dramatically swing the balance of power in the favor of the Dwemer.

So the Dwemer and the Chimer got in a final scrap, and during the course of this war the Dwemer set about to use the heart, the Dwemer scientist Kagrenac took the tools to the heart and either through gross miscalculation, or perhaps distraction from Nerevar, Voryn Dagoth and some others having made their way to the Heart Chamber- or perhaps it was their whole plan the entire time- as soon as they muxed with the heart- all the Dwemer- all over- everywhere in the world- vanished.

-Also, as far as I know, they were the only elves who could grow beards.

both bosmer and dunmer were shown with bears in morrowind and concept art.

Yeah, and the other elves (dunmer and altmer) did have facial hair, just not really big and rugged.

No one can truly know the complete motives of Kagrenac and the dwemer, but several theories exist concerning what may have happened to them exist. Some accounts say that Nerevar interrupted the dwemer's connection to the heart, causing them to disappear. Other records say that the dwarves disappeared right as Kagrenac struck the heart, suggesting a successful transfer of souls to Anumidium, or a gross miscalculation, resulting in vaporization.
Considering the dwarves' attempt to ascend to godhood would be considered extreme blasphemy by most denizens of Tamriel, and all et'Ada, some speculate that a Daedric Prince (most likely Azura if this is the case) transported the dwemer to a realm of Oblivion or outer plane once they transcended, as punishment.
There is an incredible amount of exhaustedly researched documents on the Imperial Library, I suggest taking a visit to the afore-posted link and reading up if this interests you.