I don't think it's the game, I think it's your OS doing the shenanigans. Just a guess, but you have Vista or Win7 and installed Morrowind to the default location under Program Files, and the OS doesn't like to see files get written to Program Files any more, so it has stashed them away under your Appdata directory somewhere.
Seems to me the best solution is to install Morrowind outside of Program Files somewhere so the OS doesn't try to do mysterious things.
yeah all its creating is shortcuts in the appdata folder, i wont even create an .esp, ive tried saving it under multiple names, and in different locations, i tried saving it in the c drive, in different folders, in the downloads folder under my user name, it wont save an .esp anywhere. its like it just creates a shortcut for it, but the .esp still works in the CS and in-game. When i search my computer for the file it only shows a shortcut, and it says that the address isnt valid when i click it.