According to the wiki page (http://divinity.wikia.com/wiki/Divinity:_Original_Sin_Items), at 3 Blacksmithing, your sword has 3 base min damage and 3+2 base max damage, with a -10% "boost."
At 4 Blacksmithing, it's still 3 min and 3+2 max, but with a -15% "boost." At 5 Blacksmithing, it's the same but with a -20% boost.
So damage gets WORSE as you get higher Blacksmithing? Why?