Steps to upgrade the Lucius Dagger.
1. Complete the RDagger Upgrade quest first. You cannot continue until you have done so.
2. Take the upgraded Carfel dagger to the secret bottom floor in the Leng's thief guild.
3. Make certain you are hidden and your hide level (Character level + magic level) is 33 or greater or the casters will toast you. (*Please note, at 33 you could still blink, so be sure to put your weapons away in case you die). Run past the tunnel of death while hidden, to the secret room at the end.
4. In the upper left hand corner of the secret room, drop the upgraded Carfel dagger on the hex of Elsie.Nightshade. Say "Elsie, teach me".
5. Now go to the upper right hand corner, drop the non-upgraded Lucius dagger at the feet of Jimmy.the.Fingers(*?) and say "Jimmy, teach me"
6. The dagger is now upgraded to +9/+10 and has a large increase in damage. *Note, Ice can no longer be added to the dagger and you must be level 19+ to use it.
Please note: Completing this quest line will reset your Carfel kill flag. Meaning, to be able to do this quest again, you have to fully complete the RDagger Upgrade quest.