This thread will serve (I hope) as a basic guide to how to upgrade your items to epic, and how to further augment your epic items once you have them.
------
Part 1: Upgrading an item to Epic status
Epic items are created at the Altar of Epic Rituals in the Twelve. This altar is located behind and to the right of the tower, out of your immediate sight when you enter. Next to the altar is Misty, the epic vendor, whom we will cover later. Misty is completely irrelevant to actually upgrading your item to epic (she serves only to assist in augmentations).
Epic versions exist for any named item or raid loot that drops in the Sands of Menechtarun or its associated quests (Zawabi's Revenge, An Offering of Blood, Chamber of Raiyum, and Chains of Flame). I will not list those items here, as that would create a lot of extra space.
To upgrade the item to epic, you need four parts:
1: The item itself (Bloodstone, Dustless Boots, Spectral Gloves, etc)
2: The Scroll of the Item.
3: The Seal of the item
4: The Shard of the item
Placing these four things in the altar will combine to create the epic version of that item. Doing this will give you a whole new version of the item, undoing any binding or rituals you have done with the stone of change (though the items are all bound), removing permanent damage, etc.
Acquiring Upgrade items:
The epic scrolls drop from random monsters when they die in the Epic quests. There does not seem to be any correlation between the quest you are in and what scrolls drop from the monsters (I have got more scrolls of the spectral gloves from Tomb of the Wizard-King than Offering of Blood, for example). Only one person may pick up an epic scroll when it drops. Consequently, these items are typically rolled upon, usually at a shrine, safe spot or after the quest. Epic scrolls are transferrable and tradable, they are not bound.
Epic Seals drop from any chest in an epic quest. They are bound to account. There is a high correlation between the quest you run and what seals you see (you will see spectral gloves seals in offering, but not in Wizard-King, etc). Raid-loot and explorer-area seals can drop from any quest, but do so at a much reduced rate. 4 in every 5 seals you see will be for items that drop from the quest you are in. Against the Demon Queen has a heavy preference for raid loot and explorer zone seals.
Epic Shards drop only from the Epic Chests at the end of the 5 epic quests. These chests are large, purple, and also display the epic dungeon/raid token (more on these in part 2). The shards are also bound to account and follow the same general rules as the above. Zawabi's Revenge, however, will drop shards associated with any item. (unconfirmed: ADQ do this, too?)
-----------------------------
Epic Augmentations
Most epic items have at least one augmentation slot. Augment slots are colored, and their color determines what kind of modifiers may be placed in them. There are 4 classifications of augment crystal (colorless, red, blue and yellow). There are seven colors of augment slot (colorless, red, blue, yellow, as well as green, purple and orange). A colorless crystal may go in any augmentation slot. A mixed-color slot (orange, green, violet) may accept crystals of either of the colors that make it up. For example, a green augmentation slot could take a yellow, blue, or colorless augmentation, but not a red one.
How do you acquire an augmentation crystal? You buy them from Misty, for various prices in dungeon and/or raid completion tokens. The tokens are bound to character, so you must run the character you want to upgrade on epic in order to improve your epic items, though you can make them epic without ever doing so. Misty also sells True Hearts of Wood for True Reincarnation for 20 epic dungeon tokens.
How do you use your augmentation crystal? And more importantly, how do you decide which slot your effect goes in? After all, a +6 stat effect, which is colorless, could go in either a blue or colorless slot. So if an item has both blue and colorless, how do you determine which one it goes into?
Misty also sells Augmentation catalysts. These catalysts share the full range of colors of augmentation slots, and you purchase the proper color catalyst for the slot you are filling. Putting a blue crystal in a purple slot requires a purple catalyst; a blue one will not work. Misty sells these catalysts for 2,500 platinum pieces of a single dungeon token (if you use tokens to buy these, please delete).
Placing your item, your augment crystal, and your properly colored catalyst in the altar will place the effect on your item. At the moment, you may clear augmentation crystals by placing your item and a scroll of dispel magic into the altar. You can also update your epic item this way, as some have been changed prior to Update 1, Patch 1; if you made an item epic before November 16th, 2009, you should place it and a dispel scroll in the altar and see if it improves.
Lastly, here is an index of the augment crystals, sorted by color and effect. Generally, blue slots appear on armor/shields, red on weapons/shields, and yellow on accessories, though there is some variation (some caster items have purple slots, some accessories have green slots).
Colorless, 20 dungeon token
+6 to any statistic, enhancement bonus
Colorless, 25 dungeon and 5 raid tokens
+1 exceptional, any statistic
Blue, 30 dungeon token
-15% Arcane Spell Failure
Toughness effect (20 hp, from Minos Legens)
Good Luck +2 (As head of good fortune)
Nimble Moves: +2 max dex, -4 armor check penalty
Heavy Fortification
+4 natural armor
Blue, 15 raid token
Upgrade armor/shield to +7 enhancement (by default, epic items have +6 enhancement)
Yellow, 30 Dungeon Token
Blindness Immunity
Fear Immunity
Poison Immunity
Disease Immunity
Feather Falling
Underwater Action
Resistance +4
Protection +4
Greater False Life
Wizardry VI
Spell focus, 1 school (transmutation, evocation, etc)
Red, 20 dungeon token (all red effects add dr-breaking properties)
Break DR/silver
Break DR/cold iron
Break DR/adamantine
Break DR/byeshk
Break DR/riedran crystal
Red, 30 dungeon token (these are dr-breaking effects, not added damage)
Break DR/good
Break DR/evil
Break DR/lawful
Break DR/chaotic
Red, 15 Raid
Weapon/shield gains +7 enhancement (again, epic items start at +6 enhancement)