I seriously wondered the same thing. Can't wait to be able to fully upgrade all of my new stuff!

thanks that answered my question

Upgrading your gear requires that you upgrade your crafting stations (workbench, forge etc), and that requires progressing farther into the game.... In otherwords you arent going to be able to upgrade your gear beyond the current biome limitations, however, everything is balanced so you can upgrade your gear good enough to proceed into the next biome, but just barely.

The game is designed to play only one biome at a time.... discover all the recipes, resources, upgrades that biome has to offer, which will prepare you to battle the boss of that biome.... after you defeat it, they usually drop an item you will require in the next biome, making you ready to proceed to the next biome and repeat the process... discover all the new biome has to offer... upgrade as needed, defeat the boss and move on.

The current max for Mistlands gear is level 2. You aren't doing anything wrong, that's just what it us.