Ok, let me try to see.
1) I couldn't play test. Never really cared about this system. I only know that
'bad' haves less durability but bigger armor value, and 'good' have more
durability, but less armor.

2) You should check on a shop the armor/damage values. They change as well and
it's up to you decide if a high armor item that breaks fast is better or not
than a low armor item that takes time to break.

3) ...I didn't knew that repair function could enhance your item. May try it
next time that I cheat. :P

4) ...Why would it check? Only if you want to print: "That's futile!" on the
console. :P

5) I agree with you! Fell free to rebalance it and send a patch! :)
At least you'll get your name on credits. :)
(Doubts about that can be solved on IRC)

6) -

7) Items with 0 durability should be destroyed immediately in my opinion. We
need to add a check for this (fell free to do it :) )

Ok, so. About the "good" and "bad" reclassifying, it's an "idea" not "bug". :P
...But the negative durability is 'release-blocker'.
Hmmmm...