bevinator: The sword is actually named "Heart of <CHARNAME>." <CHARNAME> is an Infinity engine message tag for the main character. However, because IWD2 is technically multiplayer-based even on single-player (because they're all PCs), you can get some funny effects with it.
For example, buy the sword, put it on your first character. It'll be "Sword of Char1." Now initiate dialog with someone using your second character. The name of the sword will change to "Sword of Char2." That's because the "current" <CHARNAME> is the one who interacted with an object or NPC most recently.
That said, it's a good sword even if the name changes around, and there's a vastly improved version in HoF mode. It's supposed to be a leftover from your future self after the game's been finished, or something.