On another note, most of the sub-species of argonian are unknown. If we assume that the argonians that appear in Oblivion are a sub-species different to that of Morrowind (and perhaps similar to those of certain past games?) then we see that these argonians are much more alike to human physiology, at least superficially. Would it be wrong to assume that these argonians are more likely to be able to produce fertile offspring than those that appear in Morrowind?
EDIT:
I had previously read Notes on Racial Phylogeny, however, as a consensus, it is fairly unhelpful and although it does provide useful speculation, it doesn't actually make a decision, and is very brief.
The Argonians of Arena were human with green skin and red eyes and a general lizard face. Looking amazingly close to Oblivion actually.
Morrowind Argonians all came from the Slave Trade. The Slave Trade is the only way the beast races got into Morrowind. Therefore, it is safe to assume that the Khajiit of Morrowind are a sub-species taken for their desirability as slaves.
But to add to that, game mechanics are also what changed the races in Morrowind to look as they did, as they didn't orginally look like that. What it would be sensible to take into account, if we are playing the 'game mechanics' argument, is that whatever the reason, Oblivion has become a part of lore, and likely next game, even if the beast races change back to their original form, there will be an explanation as to why they made the change in the first place- most likely that it was another argonian sub-species.
So really, we should still take Oblivion's examples of argonians into account.
(NOTE: I really hope that was coherent...)
EDIT: And I am trying to find a reasonably well-founded consensus opinion rather than shatter the general opinion by doing what I want.
Look at Arena. And Daggerfall. Each time they changed. With the Khajiit they made the forms.
Now, looking into the Argonian Account, I have always been under the impression that there is a division of physiology among the Argonians. Those in the more Northern, more Imperialized sections of the swamp (those where people can penetrate, where the swamp becomes mountains) are the kind seen in Oblivion. Those of the southern or backwater lands of the swamps are of the Morrowind variety. Likely, the slave traders took ships down south and raided the marshes to acquire those slaves, as it was easier than getting them from the borders (which could be mistaken for an act of war.) Or, better yet, they conversed with their more Cyrodiilic Argonian tribes to the North, in a manner not unlike the Euroopeans did to many African's, and arranged for them to get slaves from the deep south marshes.
There is also mention of a winged Argonian, though I cannot recall where I heard this. I also heard once of Imperial Legionaires [censored] Argonian women, so I must say it is a yes on sixual intercourse.
As to the briasts, no idea. But I do recall once (memory fails and I can't remember where) that Argonian females are capable of a life birth, that the egg will hatch inside of them. This occurs only in colder climates, though, according to what I had read.