Board Thread:General Discussion/@comment-174.56.112.143-20140602023525/@comment-14027812-20140603033937

Because they're magical. Mythology holds that they share ancestry with the Bosmer, and their appearance is altered by the moons. Not all Khajiit are bipedal, and not all Khajiit have breasts. Just the fact that they can relate to mer differs them from being overdeveloped beasts.