Morrowind FPS Optimizer's N-Patch (TRUFORM) feature do not work correctly (reboots at least under WinXP) with video cards based on ATI R300 (Radeon 9500/9600/9700/9800 [Pro]) + ATI Catalysts drivers v3.3 / v3.4 / v3.5. ATI Radeon 9000 [Pro] can also has some sort of problems. Hope it can be fixed either by me or ATI. As far as I know this feature works w/o problems only for Radeon8500 [LE] (I can test it) with any Catalysts driver version.
I don't play games, but there's probably nothing actually wrong with your machine as such.