For the first few days I saw a few topics on this forum and others that items needed to be unequipped to be modified. I thought so at first, too. However, after fiddling around some more, I discovered that if you don't see the item you want to modify initially, you have to either click the tab the item is under (i.e. bow, or heavy armor) or select the character that is wearing the armor on the right half of the screen. Either of these two should allow you to select and modify an equipped item.
This has saved me much grief. The customization system is freaking awesome. Love that the appearance changes, too 
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