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I am on Level 8, and this has happened twice, once when opening a chest, and second just when killing a group of 5 Ogre Lords (not opening any chest). It appears I am trying to loot an item while I have full inventory. It says, "You found a LegacyItemID_ShortSword, but your inventory is full. Would you like to replace an item in a party member's inventory with the one you found?"

The first time with the chest, this worked fine. I discarded one item for the new item. (I think it was a Shortsword then, too.) However, this time I killed 5 Ogre Lords, had no chest, but my game was seemingly frozen. No key worked except pressing Z which brought up this window with an option to replace item. I did it, then the game was still unresponsive. I hit Z again which brought it up again. And again. I now have like 7 of these because at first I was gambling hoping this was some special event and these were rare. Turns out indeed I should have trusted the Item ID, just plain.

Anyway, there's a bug. Unlimited shortswords without a chest after killing Ogre Lords. Enjoy!
Sounds like an item from Wizardry 3 somehow ended up in this game. Or something like that.

(Even though there is a Wizardry 1 version of this item.)