Let's get the sillier part of the question out of the way- — are there babies? Yes, there are.
There is at least one pregnant woman in the game.game; SerenSeren, a Blacksmithblacksmith in Skyrim mentions she is pregnant.
"We discovered recently that I am with child. I'll need to stop working next season."
Babies, while never actually appearing, are also mentioned. Specifically, in Oblivion, JauffreJauffre talks about how he took MartinMartin away from the Imperial Palace when he was an infant.
The book Poison SongPoison Song also mentions babies.
The baby in the girl's arms woke and began to scream.
This refers to both a child small and young enough to be held in a girl's arms, and shows the use of "baby" in common parlance.
Interbreeding is a more interesting issue, but the answer is also yes.
The book Notes on Racial PhologenyNotes on Racial Phylogeny states that humansHumans are capable of breeding with elvesElves and that children of such unions mostly take after their mother, with some traits from their father. It also discusses rumours of humansHumans or elvesElves breeding with orcsOrcs, khajitKhajiit, or argoniansArgonians but mentions there are no well documented offspring.
Agronak gro-MalogAgronak gro-Malog is a proven case of interbreeding, as his mother was an orcOrc and his father was, an imperial vampireLord Lovidicus, was an Imperial vampire.
