Generally, not all ingame sources are 100% correct. WoG pretty much states as much. Preliterate Argonian/Khajiit communities were well documented already established and widespread in Tamriel during the early Merethic era as documented by Topal the Pilot, which means the Khajiit would have had to have broken off during the Dawn era.
Reports does not equal verified. We only consider couples that have produced verified offspring to be fertile. That is why Orsimer are interfertile with men and mer while Khajiit and Argonians are not.
The Septim era is the exception rather than the norm, note that the Septim Empire's multiculturalism was an exception to history which typically involved most of the races trying to kill eachother. Only the cultures within the same culture group (Altmer/Bosmer and Imperial/Nord/Breton) regularly intermingled.
It matters what is on the inside as well.
Khajiit differ from humans and elves not only their skeletal and dermal physiology -- the “fur” that covers their bodies -- but their metabolism and digestion as well.
Orsimer have confirmed children with Men in ESO. Not a big surprise considering they're Mer. - Oops, I misread interfertile as infertile.
You shouldn't base the entire breeding system out of an in-universe report on limited observation.
And their physiology matters little when the child will be the same race as the mother no matter what.
It isn't like in RL where the offspring takes genetics from both parents.
And like said, ESO's era is as multicultural (There isn't an overaching Empire with everyone as citizens, but you find Bosmer in Daggerfall, Altmer in Morrowind, etc.) as the other eras, which far predates the Septim era.
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