The inventory has limited space so i played BG1 many times over stockpilling all my treasures and stuff and i was always out of room and space, which ultimately meant a hard decision of what to ditch and what to keep.

However i heard you can leave any equipment in barrels and chests etc
Is this true?, wouldnt someone just steal it all if it wasn't locked?
How about if i just leave it on the ground?

You can leave all your stuff in barrels and chest without loosing them. I frequently use some barrels in Beregost to stock potions, wands and spells or items like bandit scalps if i encounter some before chapter 3.
If you leave your stuff on the ground it will disappear after a set amount of time.

JR

Damned i lost cousin Jan's techno gloves

That's right. Everything you put in a container will be preserved forever. Everything you leave on the ground will dissapear after twelve hours of game time.

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The last arrow of Legolas kindled in the air as it flew,
and plunged burning into the heart of a great wolf-chieftain.
All the others fled. -J.R.R. Tolkien, The Lord of the Rings
http://www.angelfire.com/realm/spijl/flashyelf.gif

I myself have a room reserved for me to put things in at the friendly arm inn!

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"No!" shreiked Tyrion. Though the sword felt heavy as a fallen tree he lifted it. He saw the deamon look up, astonished. He brought down the blade with the awesome majestic power of a falling thunderbolt. The burning blade caught the deamon right in the centre of its forehead. The deamon's head fell apart under the force of the impact. The deamon N'kari sank to its knees, dead.

-Tyrion at the battle of the Blighted Isle.

It is a good idea to store your stuff in a place that you will remeber easily such as one of the inns.

Does taking stuff out of the barrels/chest/cabinets etc. hurt your reputation?

In Beregost there is a house on the east side of town with a wagon out front, right across from the Red Sheaf Inn where Silkie is standing, that you can use as a home base to sleep and store stuff (it has two chests--just leave the owner's stuff alone).

No, usually it wont hurt your rep, though id reccommend to role-play... in a party lead by a paladin it wouldnt make sense to robe the houses...

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http://www.angelfire.com/anime2/memnoch/ertai2.gif "Sigh" -Ertai, Captive of the Blinding Angel