http://www.imperial-library.info/mwbooks/battle_redmountain.shtml
Once the Nords were driven out, General Nerevar of the Chimer and General Dumac of the Dwemer, who had come to love and respect one another, resolved to make peace between their peoples. In that time I was but a junior counselor to Nerevar, and Nerevar's queen, Almalexia, and his other favorite counselor, Sotha Sil, always doubted that such a peace might long survive, given the bitter disputes between Chimer and Dwemer, but by negotiation and compromise, Nerevar and Dumac somehow managed to preserve a fragile peace.
But when Dagoth Ur, Lord of House Dagoth, and trusted as a friend by both Nerevar and the Dwemer, brought us proof that High Engineer Kagrenac of the Dwemer had discovered the Heart of Lorkhan, and that he had learned how to tap its powers, and was building a new god, a mockery of Chimer faith and a fearsome weapon, we all urged Nerevar to make war on the Dwarves and to destroy this threat to Chimer beliefs and security.
blah blah blah blah
The Dwemer themselves were "transported" to the next tower (in Skyrim) when they used the tools on the heart (besides other things that happened), and you'll see that in TES 5.
The Dragon definitely Broke when the Tribunal became gods. The reality of time said to itself: "wait, are these guys kidding me?". It soon realized they weren't.
So time had to retcon everything, otherwise what had transpired would make no sense at all. So, it came to be that the Tribunal had been gods since they were toddlers, and Dagoth Ur, who had played with the same toys at Blue Mountain and therefore had to play by the same rules, had been thus himself.
Instead of being junior counselor to Nerevar like it had been in the first reality, Vivec was his mentor. http://www.imperial-library.info/mwbooks/lessons.shtml.
The whole twirling, spinning and messing up of time had serious consequences, though. The second time they fought at Blue Mountain, the Tribunal were gods, Nerevar was hawter than ever, the Dwemer were still the Dwemer, Dagoth Ur was allied with the Dwemer (he thought alike with monseuir Kagrenac), and the Orcs and Nords were there too. Also, the Chimer had herein always been the Dunmer.
Why the Nords? Well, this time Lorkhan's avatar http://www.imperial-library.info/mwbooks/wulfharthsongs.shtml. And the Nords were big fans of his.
The Orcs' stake in the whole affair should be the topic of much speculation.