The Saxhleel only really hold the contested lands on the southern border of Morrowind. Full on take over of Morrowind was never really the goal.
If I remember correctly, you are definately right about your border assumptions. It's worth noting that the Argonians never really meant to conquer all of Morrowind, just to get revenge for the oppression of their people by the Dunmer, and even if they did intend to conquer, I suspect that they wouldn't be able to hold it for very long. It would, however, make more sense for them to conquer parts of southern Morrowind, as it is known that parts of that region are swamps and marshes similar to Morrowind. Interestingly, according to the 3rd Edition pocket guide, Morrowind actually conquered some of northern Black Marsh during , so the Argonian's could have merely reconquered their lost lands. As for Sul's dialouge, I personally suspect (without any real evidence) that residual Argonian forces remained in control of parts of Morrowind after the war, but as a result of several of their major cities being destroyed by Umbriel, were cut off from their supply lines, and then swiftly were swiftly expunged by the Redoran. Or it could just be that Sul hasn't been home in a while.
There are still hostilities at the southern end of Morrowind, it supposedly being contested territory as of Dragonborn. Where the southern boarder is and how much the Argonians reclaimed is another question.