While unrelated to Kahuna's rather nice way of dealing with the diplomacy skill, I'd like to comment on the other part of Frostmarrows question: Dice Rolling vs. Role playing.
In my campaign the dice rule what happens, so a diplomacy check made with a beautifully roleplayed story is still...
Core books 3.0 (PHB DMG MM)
Monstrous Manual 2
Arms & Equipment Guide
3.5 SRD
Psionic Handbook 3.0
Van Richtens Arsenal would have been handy, but I didn't bring it.
We've been focusing alot on why the stealing would be evil or not.
I think in order to reason wether killing would be more or less evil than stealing a firm basis on why killing the merchant would be or not be evil is needed.
Dreaded beast, in his original post, made it seem like killing the...
biscuits, just plain simple biscuits.
It's not like the Mind Flayers is going to eat the cookie, so maybe a better question would be: "What kind of cookie would you eat before the mind flayer eats your brain?"
Actually there is a work-around on the whole TPK vs. Cakewalk thing.
Just make sure there is alot of enviroment to work with (tables to throw, ledges, cauldrons of boiling nastiness, sudden darkness, nearby open fires, combat on the roof of a coach: "Watch out for that Inn sign", Meat hooks...