The funny part is I never actually found out what happened to them despite having played morrowind way too much...now I know.
It was never explained in Morrowind, that's why.
The book I referenced seems to be new to Skyrim.
As for lore contradicting itself: I agree. I read a book that talked about the events of Arena, but it said it all happened 3E 389. I have been switching between Skyrim and Arena, and Arena takes place in the Second Era; not the 3rd. XD
Spoiler However, I just realized that perhaps, like with Alduin, the Dwemer merely transported themselves forward in time.