I like how it sounds so far, though I still have a few nagging worries. As some others have mentioned, there needs to be some sort of limiting factor to prevent people from turning a single weapon or piece of armor into a materia factory. Whether the item is consumed, the stats are stripped from the item giving a weaker materia or none at all subsequent times, or if there's a counter system much like enchantments in XI, something needs to be in place to promote the use of several armors and weapons as well as prevent spamming materia creation. To balance it out perhaps allow people to erase their built up materia, resetting their attachment points, to try again for a better one, though ultimately yielding only one or two actual materia.
There's obviously more that needs to be detailed about the system, but given proper implementation I bet it'll be a really fun system. Especially if there are tons of materia types and tons of factors that attribute to materia creation perhaps including job, enemy types defeated, types of attacks, etc. Making that perfect materia should be an event in and of itself!