Really? I surprised this hasn't been addressed before, I was even going to try some thing like it. Have you tested this thoroughly, if not I'll look at it a little more closely. Dialogue mods have been a complete no go, now maybe we xbox users can have a COMPLETELY moddable morrowind at last?
I'm not questioning your intelligence here, but did you make sure your cache was cleared and the old morrowind.esm wasn't still lingering about? It's easy to do, and have done it myself once (or twice...).
I'm still not sure what the convertor does to nif and textures, having yet to see a mod that had any texture problems at all.