Minecraft PC has new enchantment repair and rename system in work

Nathan "Dinnerbone" Adams dropped hints over the weekend of a new repair system he is working on just for enchanted items as part of an upcoming update to the PC version of the game.
Adams tweeted out a series of "sneak peak" screenshots that showed enchanted items being combined together to form new items that are sometimes upgraded and appears to allow the items to be given a new name. These aren't freebie upgrades though as the developer plans for players to use experience points in order to pay for the enchanted item repair system.

Level costs are subject to tweaking, but I want them to be high," he said.

He later went on to provide more details.
"The example was just showing off as many aspects of it as you could," Adams explained on Reddit. "This isn't actually something you'll be doing often. This was applying enchants (expensive) + repairing (expensive) on an already enchanted item (very expensive).
"It'll be balanced by its very high costs, with an upper limit on how much it'll let you spend. Things get more expensive each time you play with them, so eventually when you start hitting a high level (such as in the pictures) then you can't do it anymore and have to get a new pick entirely."
The new system appears to be limited to a maximum of Level V enchantments with the repair cost getting higher with each level. Combining two enchanted items of the same level possibly increases the level of the resulting creation by one until the level cap is reached.
If two enchanted items of different levels are combined, then the newly formed item will be at the level of the highest item that was used. For example, if a Level III pickaxe was combined with a Level II pickaxe, then the new pickaxe would be Level II.
Conflicting enchantments will not work with one another resulting in one of those enchantments getting discarded. It's unsure which one this will be currently but it is possible that the enchantment in the first item slot will override the enchantment in the second item slot.
As for the current repair system, Adams says it will "stay as it is."
Mojang is currently working on the Minecraft 1.4 "Pretty Scary Update" for a release later this month. Presumably, the following update will include the new enchantment repair system