The "Dwarves" started out as your typical bearded, short, mountain-dwelling folks in Arena. Everything from Redguard on completely went against that. Only the name remains. They are normal height, inspired by the fertile crescent civilizations, posses computer technology, possess steam technology, can alter the state of the world by manipulating music, can communicate telepathically, think they are gods, built a god, became a god. They do have beards, but they got that from the giants, too. Outside of surface similarities, they are nothing like typical "dwarves."
Except that they were building a god, not weapons. You also ignore the fact that we don't (can't) really know what happened at Red Mountain - the ALMSIVI might have killed Nerevar, he might have succumbed to his wounds, he might have committed suicide by letting the ALMSIVI slay him (
"Vivec said, 'I brought you here because I knew the mightiest of my issue would succumb to Muatra without argument, if only I gave him consolation first.'" - 34th Sermon).
Outside that single reference to colonies all over Tamriel in Morrowind dialog, we don't know that the Dwemer had colonies anywhere other than Morrowind (their home province and the highest concentration of their ruins) and Hammerfell (the exiled Rourken clan at Stros M'kai, Volenfell, and Fang Lair). We know that the Rourken traveled through Skyrim, and Fang Lair and the Velothi mountains (full of Dwemer ruins) might be part of Skyrim now that provincial boundaries have shifted.
As for their disappearance, word of god is that they became the "golden skin" of the Numidium. I doubt that we will get any better answers in Skyrim, since they have their own elves to worry about.