I've heard from somewhere that if you upgraded something thats eth the result is that it gets the upgrade bonuses and turns into normal (ex. eth lidless + upgrade = norm upgraded lidless).Is this true or just a rumor?
Yes, it's true for all armors (including shields, helms, etc.). The item stays ethereal, but loses the ethereal bonus. Like Loboleal said, the item will not have the x1.5 bonus to base defense from the 'ethereal' mod.
I think he's asking whether upgrading an ethereal item would turn it into a normal item or not.
To that, I answer no. It remains ethereal, but armor's have an additional bug in that they don't take the ethereal 1.5x defense modification into account. What you'd be left with is an ethereal item (that would eventually break and be unusable) that *might* have even lower defense than the item you started out with.