Ok so, I'm not sure if anyone's actually figured this out or not, but i found out i was 123lbs under-encumbered today and i didn't think that was quite fair. so i went comparing 2 save files, one with me holding a bunch of items and one with me having none. I edited the differences on the test file and saved till i noticed a difference in my encumbrance. as a result i've found the exact location of the encumbrance data for the player. its is a 32bit long data type. to set it to 0 encumbrance simply change the boxes i have outlined in the picture below to be 128 000 000 000.
http://img706.imageshack.us/img706/8541/enberancefix.png
the first 4 bytes of the last 8 bytes are the encumberance data. the last 4 of those 8 bytes are your maximum encumbrance.
Obviously I'm using the Morrowind Enchanted editor and if you're about to ask where that spot is in the save file, look on the left first to see what data tree branches are opened.
Finally, this only took me 15 minutes at most. I know this isn't ANYONE'S problem to fix, but why hasn't a fix for this been made yet? It's been plaguing my friend for years till i fixed it today for him. :-/