The recently announced Item Upgrade system in Skyward Sword was something I covered just a few days ago. Nintendo has just revealed that in addition to upgrading existing items, Link will now be able to craft new equipment entirely from scratch, so long as he has the right ingredients available. The items that Link equips can be upgraded at the Scrap Shop.
A new weapon upgrade system allows players to gather raw materials from throughout Hyrule that can be used to upgrade weapons, equipment and items, or create entirely new ones from scratch.
Raw materials can be procured by defeating monsters or found within the environment.
Source: Nintendo