I like this idea... could spawn a lot of weapon-specific level-up traits that could be used.
Examples:
Sharp - +1 to Damage
Heavy - +2 to Damage - 1 to Intiative
Keen - +10% Critical Chance
Brilliant Energy - Ignores armor values (and blade looks like energy rather then metal anymore)
Vorpal - +25% chance to instant kill (needs balancing probably)
Flaming - +5 Fire Damage
Freezing - +5 Ice Damage
and so on...
I really like the idea. For really powerful ones, I'd suggest some kind of trade off from the wielder...like, Bloodthirsty Longsword requires blood from it's holder to be used. -3 Con to the wielder. Something of that nature. Could make it scale, and provide bigger penalties to the holder as the item gains more levels.
Just my two cents.