In the 360 version they begged you for items, but if you didn't give them to them by certain BRs they upgraded automatically. I think I read somewhere that the PC version doesn't do this and you HAVE to farm the item. Is this correct?
yep, they upgrade them even without items, on my game happens to torgal, when he have leraje princeps, he ask me for items i didnt have, and after a sidequest i rank up 2 BR, i back to town and he have leraje regis, with that caracteristic blue glow. so yep.
I think they do upgrade automatically aswell. I say this because David needed Vulture Rawhide, and I tried getting it for him, but it rarely dropped, and there was like 5 of the monsters per run, so I gave up looking.
Then later, i noticed that the shield had upgraded, and he no longer needed it.
They auto upgrade! I think I've only manually upgraded a char like 3 times, then I stopped farming metals and they still ended up getting the upgrades... So... between BR 35-85 I didn't use Mr. Diggs at all! And, all my leaders weapons upgraded! (side note: I don't see why they don't fix it to where if you already have the items they just ask for them and take them from your inventory!)