Technically, it only matters where you install Morrowind if you intend to play it.
You mush have Morrowind.esm, Bloodmoon.esm, and Tribunal.esm in whatever directory you tell the installer is your "Morrowind Directory."
There is no bug in the Installer; you don't have all the files it is looking for.
#1
You have to have them installed in a directory other than Program Files for the installer to detect the game. :S