Here's the scenario I want... There's a smith NPC in the fort who looks over the different armor pieces and weapons in the room. I don't want him sell these armor pieces/weapons to the PC, but he can still buy/sell the same types of armor and weapons, as he has his own inventory. But I also want him to refuse to buy the items if the PC steals these items in the room like they were stolen from him. Is this possible without making new items or scripting the items themselves in vanilla morrowind?

Probably not possible. I'd try making impossible to steal unnoticed instead. Put some guards in there, and attach a local script like this somewhere, never tried, but it may work

begin noStealScriptif ( player->GetChameleon )	player->SetChameleon 0endifif ( player->GetInvisible )	player->SetInvisible 0endifend

I think abot is correct - there is no way to achieve everything that you want. A compromise of some sort may be necessary.

It sounds as if you want the armor and such 'decorating' the interior to always be there (no sale of goods). This could be achieved by making new static objects to which you assign the appropriate mesh. Alternately you could create a new ID of that armor and attached a script that prevents the player from picking it up. Both of these solutions you may not like because they prevent the player from interacting with it normally (it is unrealistic). However it is not unprecedented in the unmodded game, and I have used such an approach in the past with a clear conscience.

If it is more important to you that the player to be able to take it and be caught stealing but not have the merchant sell the armor, there are a few approaches. One is a variation on abot's suggestion. You can create a guard in the cell and assign ownership to the guard rather than the merchant. That will create a response to the theft, but not allow the item to be sold. The alternative is to make the display armor and such to have a unique ID and then add new dialogue entries for the merchant under the Service Refusal tab filtered for each unique item. Dialogue Results could then assign a bounty, recover the item, summon a guard, attack player - any number of possible responses. Either solution means that the object could be removed from its display location, although unique items could be repositioned by script.

Thanks... I forgot to mention that the items need not be displayed, and can be inside a container... I might try that service refusal option instead...

I resolved this issue in one of my mods (Demolank's Shop) by placing copies, that are not labeled as the merchant's property, of whatever the merchant has for sale, and placing them inside display cases, where the customer cannot access them. Then I placed the real merchandise inside crates lying outside of the interior and gave ownership of those crates to the merchant. Basically, his stuff is on display, but the cases aren't what he reaches into during a transaction, it's the crates (that you can't see or reach).