I think my favorite character is vivec, maybe no surprise there. When I played morrowind I really didn't care for the buoyant armigers, but the more I read about them, the more interesting the seemed. Was it MK that called them 'bisixual samurai'?
The story of Cyrus and Vivec (the blade meeting, I think its called) was superb. And although it isn't canon, tho orc creation myth over at temple zero is amazing. It would be great to see it become an in-game book, perhaps with a little editing.
That's just a few of my favorite bits off the top of my head... to be honest I'm constantly finding more and more interesting stuff! What are some of yours?
Edit: oh, and my favorite explanation for the disappearance of the dwarves, from MK's post about the nords lack of a creation myth: "That's what happened to the Dwarves, by the way: their minds froze to death by thinking one thing over and over until poof, gone in a belch of a mountain."