Very common problem. Windows hides file extensions from you, the file is there but is marked "baldur" rather than baldur.ini . And when you search for it, windows isnt set up with any common way to edit .ini files, so it gives you that dialogue box.
On windows98, go into your BG2 folder, view menu, preferences, then search around till you find the option "hide extensions for known file types". Cant remember exactly where it is under win98.
For windows XP, go into control panel -> folder options ->view and the same option is in that list.
When youve turned that off, baldur.ini will be clearly visible in explorer. If it asks you what to edit it with, choose notepad.
The other solution is to work with DOS and use the edit command.
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