To craft items in single player mode, collect objects such as Fairy Dust, Dragon's Blood and other unique monster parts. Bring them to the magic shop in the second town and enter the laboratory. Place two of the items in the box, close it, then cast a spell on the box. Depending on what combination you put in and what spell you cast, a different item will be created. Five combinations are written in the Tombs of Illuskan. The owner of the magic shop will send you on a quest to get those books.