I've got the exact same problem. Unfortunatley I haven't been able to fix it so I can't help. Though it might help if you posted your weidu log. Those who know what they're talking about (ie. not me) can use that kind of information.
I would also suggest the Ruad mod, it is compatable with ItemUpgrade (at least it has been for me) and allows you even more chances to make some neat new items. But be careful because they both use some of the same one time only items.
Just to make the story a wee bit stranger, before going to Icewind Dale the smith never worked. Now that I'm back from icewind Dale it works fine...odd.
Yes I've tried to go past it, I got warped to the Government District right after (plot-thing) then to test I went to the Umar Hills (making sure it wasn't an area thing) but it continued. If it matters I am playing it on the highest settings, would lowering it help? Or is the stuttering caused by something ingame rather than computer capabilites (I've read its an ingame thing)?
Well actually I now feel like an idiot, I got annoyed with it when it happened again so I just left it like that. About 5 minutes later it suddenly started the right thing. Sorry for asking for help for a problem I didn't have.
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