Mods I use...
Morrowind Comes Alive = Adds thousands of randomly generated NPC's that stroll the land.
Traveling Merchants = Adds pre-scripted merchants that route between the citiies.
The Lighting Mod = Adds pseudo-dynamic lighting to the game. Very beautiful at night, expect performance hit. Also kick-ass inside caves. Bring your torch!
Atmospheric Sound Effects = Goes overboard and adds thousands of new sound bytes that add to the atmosphere. Especially notable inside caves (Very creepy) and in swamps.
Harmless Wildlife = Just what it says... it's retarded that all wildlife goes rabid on you for no reason. Now they don't (unless they're a predatory species).
Super Adventurer's Mod = Heavily tweaks the game, skills, spells, armor and weapons for better balance, and also goes into lots of other areas. There are several versions of this, the latest one being the "Super" one. A must!
NPC Replacer = Replaces all of the stock NPC's and auto-installs Better Heads / Better Bodies on'em. A very good thing.
Living Cities
of Vvanderfall (or whatever) = Basically adds RAI to Morrowind. Scripts NPC's to lock-up at night, go to taverns during the day and basically not stand still like retards. Thankfully, no dogs were harmed in the making of this mod.
More Trees & Foliage = Just what it says. It adds tons of more forested areas, AND replaces most existing trees with higher-res ones.
Now for the most important ones...
The Visual Packs 1.1 and 1.2 and the Visual Pack XT basically retexture Morrowind and makes it much, much prettier. Almost 300mb's of new textures.
Blocking Enhanced = Makes your blocking skill go to 100% when you right-click, therefore making blocking just like in Oblivion... FEEL THE ORC'S FEAR.
And last but not least... Real Signposts! Finally, legible handwriting on those blasted things. OBLIBBION!!!
Anyway, those are all the mods I use to make that piece of dung bearable. Graphically speaking, The Lighting Mod and the Visual Packs are THE things to have, a WHOLE new experience. Caves are scarier with the Atmospheric Sound Effects and the pseudo-dynamic lighting from TLM is great for going deep underground with a torch in hand. For general playing the NPC Replacer and Morrowind Comes Alive are musts, as they basically populate the land instead of it being almost empty (just imagine how even empiter OB shall be!), and the Traveling Merchants are very nice. Also, although I do not use them, there are tons of "Companion" mods which basically add a follower for you that has some AI and can be equipped with weapons & armor. I suppose its nice if you get scared in the tombs or something, or just use them as pack mules.