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I want to upgrade my Blades Sword to "Exquisite," but the game keeps telling me that I "lack the skill."

What do I need in order to improve this weapon further?

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The Blades Sword is considered a "steel sword" for the purposes of blacksmithing, so you'll want the relevant perk (which is, incidentally, the first perk in the tree) and a high Blacksmithing skill in order to continue to improve it.

If your skill is too low, you can improve it by creating and improving other weapons and armor. It used to be that making Iron Daggers from Iron Ingots and Leather Straps was the best way, but they nerfed that in a recent patch. It's still worthwhile to craft daggers, but not as worthwhile as it used to be. Simply buy up the stock of Iron Ingots and Leather Straps at your local blacksmith and get to forging.

Note that you can also boost your blacksmithing ability with potions or gear that is enchanted with the "Fortify Smithing" effect.

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The relevant perk is very helpful, but not necessary, if you get enchanted smithing gear. That said, using the enchanting skill gives you effectively no bonus for a long time, then a nearly game-breaking bonus (even without alchemy), so smithing skill + occasional purchased enchanted smithing items is probably more fun. –  Theodore Murdock Mar 24 '12 at 18:38
    
@TheodoreMurdock, you are correct that it's not a requirement - I've edited my "need" to "want" to reflect this :) –  agent86 Mar 24 '12 at 19:11
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Basically, you need your smithing skill to level up more. You'll need to have your smithing at level 40 if you have the steel smithing perk or level 65 if you do not have the perk. If you're one or two levels away, you might be able to do it if you drink a smithing enhancing potion or wear something enchanted with a smithing enchant. Otherwise, you'll have to use your smithing skill by making things, like iron daggers, for it to level up.

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