Sometimes it can be confusing... the readme might say something like "extract contents of folder directly to data files folder". Then when you look, the compressed package has a folder named "The mod's name" then a "data files" folder inside that, and then folders for meshes, icons, textures, etc.
Quite often if you try to select the data files folder to extract to the morrowind folder, or the contents of the data files folder to the data files folder in morrowind, your zip application (tugzip, 7zip, etc.) will extract the entire tree and put it where you extracted it to.
In that case you would have inside your data files folder a folder named "the mod's name" then a data files folder inside that and all of the resource files inside that.
While some here may disagree with me, I've had very good luck installing most mods by extracting them to a temp folder on my desktop, and then just dragging and dropping the contents into the appropriate folder... that is if the mod has a data files folder, I will just drop that into the morrowind directory, and agree to overwrite. Of course you want to take a look at what you have in the mod's datafiles folder first, sometimes there is more than one .esp and you might need to remove the extra one.
I hope I've been more helpful than confusing...