According to http://i55.tinypic.com/1jugs4.jpg, Tel Aruhn is a castle. Is the book incorrect (i.e: just fiction), or do Morrowind's locations and their designs contradict Morrowind's books yet again? Or by castle, does it mean a Telvanni tower fortress?

Perhaps it's meant to read "strategic border castles such as this one, as well as [towns such as] yadda yadda yadda?

its a defensive position ruled by a noble (lord gothren) with peseants, knights, and even a moat. Its a castle, even if its not made out of stone.

It's not like Juilek has ever been there. He's trying to flatter Morrowind into a deal, you might as well embellish. You know if someone invades the place they're just going to flood it again.

I'd say that is probably accurate, just because a place isn't your stereotypical Medieval castle doesn't mean it can't be called a castle.

Of course, I suppose the theory that the speaker had never been there before and did not actually know what the place was like could work too.

Although, if you think about it, a castle served 2 functions depending on where they were built. They were a place where a king could claim an amount of land as theirs by literally being able to plop an army onto it. Important since the ultimate metric for whether a nation owns a place is whether their subjects are squatting on the land. They also were a place that could protect another place. For instance, Salzburg, Austria was originally built as a waystation and military fort to protect the salt caravans after having crossed the Alps into Austria.

Tel Uvirith is a castle built with claiming the Molag Amur region for Telvanni in mind, while Tel Aruhn seems more as a fort/retreat point for protecting Sadrith Mora, Telvanni's capitol, in mind. Wolverine Hall doesn't count because it is an Imperial fort and thus will not serve Telvanni's interests.