Don't you use MGE? I have never had to put that in my INI since MGE takes care of that for me. You just need to tick it in the Morrowind INI tab...
nope havnt got round to installing MGE yet.
I have found the problem - using the suggestion by pluto to install elswhere.
Basically on XP I installed to: programmefiles/bethesda softworks/morrowind
On windows7 its installed: programmefiles(x86)/bethesda softworks/morrowind
theres also a directory for programme files so i just copied it all over to there. It would seem that the programmefiles (x86) directory for windows 7 doesnt allow morrowind to read the ini. and must be installed to programme files.
I think this is because alot of mordern games are using the (X86) directory and thats why the origonal is still on windows 7 ????
anyway, I got it working.