Quite clearly they exist in the realm of Morrowind. There is a "romance" option for male characters with Ahnassi (sp?) in Pelagiad. Moreover, an in-game book I read recently, The Last Scabbard of Akrash makes explicit reference to a romantic relationship between a female Dunmer and a male Khajiit slave.
So this leaves some questions. How human/elven or feline are the Khajiit? And if they are more feline... what exactly are the game developers suggesting?
More seriously, is it just me, or is anybody else initially taken aback by the concept?
And remember guys, please keep it clean and on topic, thanks