Here's what I'd like to see:

- Materia that doesn't stat-stack, and provides actual abilities and spells.
- Different amounts of materia slots on different gear
- Materia can be equipped and removed freely to different gear
- Some slots are "linked," causing materia to combo together in various ways (think Thunder magic + All to hit all enemies, etc.)
- All materia starts out at Tier I, then gradually levels up to higher tiers when gaining experience and becomes stronger (Fire -> Fira -> Firaga, etc.)

...so yeah, pretty much what everyone else said, lol. You could still have your stat-stacking materia too, of course.

My only concern from there would be how DotH's and DotL's would be involved, as there probably wouldn't be much need for catalyst items or melding anymore. Perhaps they could keep the current melding system, but reserve it for when you want to meld materia to gear that doesn't have enough slots on it. You could still have the drawbacks of possibly destroying your items, having the materia stuck there until purged by the goblin NPC, etc.