Throughout the world in The Rose Of Eternity, you will come across many items that can upgraded to unlock special properties.  For instance, the Sword Of Galladoran can have attack bonus added to it, depending on the materials you have with you.  When you talk to someone who can upgrade items for you, if you and one of your party members currently has an item that can be upgraded on them, it will show up in a list when you talk to the upgrader (usually a blacksmith).

TEMPERING

This is the process of strengthening certain items. All the upgrader needs to perform this is certain types of materials, such as wolves iron. When you talk to them, if you have the specific item on you, you will see all the upgrades they can perform on this item, as well as what materials are needed. 

ENCHANTING

This is the process of giving magical properties to certain items. A caster must always be present, and sometimes depending on the enchantment, certain materials might be needed as well. As with "tempering", as long as you have an item that can be enchanted on you, you can see what types of enchantments can be put on it, as well as the type of Caster, level, and materials needed