I finally figured it out. I have searched and searched and finally came up with a repeatable fix.

I followed all the instruction in this that ihave found on the web and on this forum, and none of them have worked for me. I am not saying that they do not work, but they did not work for me. I even reinstalled my PC twice during this troubleshooting process.

This is the fix if you are using Windows 7 64 bit. At the end of the post is some cool tools to see what is going on in your machine. This is on a completely reinstalled Windows 7 64 bit with the newest updates (04-21-2011). I have not installed any codec packs. I do not have any filters registered (more on the confusion later in the post). Basically a default installation.

Download Zoom Player (I used Version 7 Professional)
http://www.inmatrix.com/files/zoomplayer_download.shtml

Download regsvrGUI
http://www.softpedia.com/get/System/System-Miscellaneous/Graphical-Interface-to-RegSvr32.shtml

Have Morrowind, all the Expansions, and the most up to date patches installed for each installed.

Install Zoom Player (You can use RevoUninstaller later to Uninstall or Control Panel)

Unzip regshell.zip (this is regsvrGUI all zipped up) to your desktop

Run it

Navigate to C:\windows\sysWOW64\ (you have to double click the folder icons to drill down or up the tree)

On the right panel find quartz.dll

Click Register

Now open Zoom Player and goto Options (control + O)

Swtich to Advanced Mode

Drill Down to System - Filter Management

Click Merit Manager

You will now see a list of all the filters that are registerd on your machine.

Here is the list of Filters that are in quartz.dll

ACM Wrapper
AVI Decompressor
AVI Draw
AVI Splitter
AVI/WAV File Source
Color Space Converter
File Source (Async.)
FIle Source (URL)
FIle Stream Renderer
Internal Script Command Renderer
Line 21 Decode 2
MIDI Parser
MJPEG Decompressor
MPEG Audio Decoder
Mpeg Video Decoder
MPEG-I Stream Splitter
Multi-file Parser
SAMI (CC) Parser
VGA 16 Color Ditherer
Video Mixing Renderer 9
Video Port Manager
Video Renderer
Video Renderer (Yes there are two that are the same)
Wave Parser

The magic Morrowind Filters are ACM Wrapper and MPEG-I Stream Splitter

Info Here:
http://msdn.microsoft.com/en-us/library/ms783348.aspx

I only add the others so you can remove them if you like a clean system. I use MediaPlayerHometheater and XBMC because I do not like dealing with codecs.

Here is the kicker. VERY IMPORTANT!

If you run Morrowind after running regsvrGUI and then remove all the codecs with the filter manager in Zoom Player except ACM Wrapper and MPEG-I Stream Splitter. It will not work the second time.

IF you want to remove the extraneous filters do it first THEN run Morrowind. Do not ask me why it makes no logical sense. Just don't run Morrowind first. If you want to leave the other filters you are still golden.

That is the fix. I konw it seems unecessary to install Zoom Player, but the merit manager that is built in is a really nice tool for seeing your registered filters.

Here is the confustion:

Windows 7 freshly loaded doesn't have any filters registered, but WIndows Media Player 11 and 12 can play mp3 files and other various video codecs. They must have built-in codecs like VLC, MediaPlayerHomeTheater or XBMC or I am just ignorant.

If you open up the Morrowind title MP3 in Graphedit before registering quarz.dll you will see MPEG-I Stream Splitter but no ACM Wrapper. After you register quartz.dll you still do not see ACM Wrapper.

I added ACM wrapper by hand and put it after the MP3 Decode and before the default audio driver and it still worked fine.

Wierd.

I really need to learn more about this stuff.

Hope this helps others who just wanted to relax and play some Morrowind.

(Editing was due to the fact that I copied my post from another forum which had added info that doesn't pertain to this entry at this forum)