Morrowind was supposed to have alien flora and fauna, completely different from the rest of the world. Except the rats and the non-Argonian NPCs, there are no mammals portrayed there -- just reptiles, bugs, arthropods, and giant flying mutant jellyfish. Oh yeah, and slaughterfish.
That said, I miss the sea dreughs (they were there in the Iliac Bay after all) and there were many more other mythic creatures from older games they could have placed. Presumably, they didn't include the medusa, lamias, harpies and nymphs from Arena and Daggerfall because, hey, boobies are completely forbidden in today's America. But they could have added giant spiders, ghouls, lizard men, giant scorpions and mummies.
I thought because they where smack in the middle of everyone that they would have the most animals from all the other lands that border them
Yeah, no. The Velothis Mountains are a natural barrier that prevents the oddities from Morrowind from pouring in Cyrodiil, and vice-versa. Morrowind is surrounded by mountains on the West and South-West, by jungles in the South, and by the ocean on the other sides.