Equipment comes in one of four different rarities. The base rarity is Normal (White), and modifications for being Magic (Blue), Rare (Yellow), or Unique (Orange) are added on top of an items base statistics.
Items dropped by Monsters, Chests, and breakable scenery has a chance to be any of the four rarities. Magic and rare monsters have a higher chance of dropping higher rarity equipment. Additionally, a Character can have bonuses to their chance to find rare items granted by their equipment or by certain Skill Gems. These bonuses are only applied by the person who lands the final blow to a monster - multiple characters attacking a monster will not stack their item rarity bonuses together.
Increasing your Rarity percentage will increase the likelihood that you will find Magic, Rare or Unique items. Increasing your Quantity percentage will increase the amount of Orbs you find.
Magic, rare, and unique items found by the player are Unidentified and a Scroll of Wisdom must be used to discover their properties. Normal items can be upgraded into magic, rare, and unique items using a variety of Orbs. Magic items can be upgraded into rare items using a Regal Orb.
The number of Sockets that can be found on an item do not change between rarity, they rely on the implicit level of an item.
Normal rarity items are basic items without any extra modifiers on them.
They can have static and variable statistics - for example, a Driftwood Wand's base damage is always 3 to 6, but it can grant between 10-15% additional Spell Damage. These variable statistics can be rerolled using a Blessed Orb.
A normal item can be upgraded into a magic item using an Orb of Transmutation, or a rare item using an Orb of Alchemy. Using an Orb of Chance can upgrade a normal item into a magic, rare, or even unique item of the same base type. The number and type of mods granted to a normal item through upgrading are random, and the level of the mods is determined by the item's item level.
Magic items have the same basic statistics as a normal item of the same type, but can have up to two magical modifiers on them, one prefix and one suffix. The level of modifiers that can be found or added to an item depend on its item level.
A magic item with only either a prefix or suffix property can have a second property of the missing type added to it by using an Orb of Augmentation. The modifiers on an item can be rerolled into different mods using an Orb of Alteration, or their random values can be rerolled using a Divine Orb.
A magic item can be upgraded into a rare item using a Regal Orb. It will retain its current modifiers and a new modifier will be added.
Rare items function the same as magic items, except they can have up to six modifiers - three prefix, and three suffix. A rare item with less than the maximum number of modifiers on it can have an additional modifier added using an Exalted Orb.
Unique Items have the same basic statistics as a normal item of the same type, but have specific names, unique artwork, and set lists of modifiers. It is GGG's intention that each base item has at least one corresponding unique item.
Unique items are meant to be less powerful overall than high-level rare items, but offer unique gameplay and allow special character builds to be based around them.