My bad, above lines are from classes/vendor_shipping.php and not item.php
---classes/vendor_shipping.php----------------------------------------------------------
81) foreach ($this->modules[$vendors_id] as $value) {
82) echo '<br> value is '.$value;
83) $class = substr($value, 0, strrpos($value, '.')); // $class is the filename without the .php
84) echo '<br> module is '.$module;
85) if (tep_not_null($module)) {
86) if ( ($module == $class) && ($GLOBALS[$class]->enabled($vendors_id)) ) {
87) $include_quotes[] = $class;
88) }
89) } elseif ($GLOBALS[$class]->enabled($vendors_id)) { //Module is enabled for this vendor
90) $include_quotes[] = $class;
91) }
92) }
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And yes, all other modules work fine the error is received only when per item shipping module is installed. If I just uninstall the Per Item module every thing else works fine, but unfortunately it is one of the required shipping method.