Please don't make this a mechanic, that makes the game into a repetitive and tedious micromanagement hell.
So far, I've managed to avoid this by having every single dwarf in the fortress belong to militia squads and wear metal armor. Now that armor degradation is in, I'm pretty worried that it becomes much like with clothes. They pile up, can't be sold fast enough, and need gimmicks like drawbridge -annihilators to get rid off. In great amounts they lower the FPS significantly, which is the #1 reason why fortresses get abandoned.
There's no option to repair anything - which is both unrealistic as well as breaks the suspension of disbelief. Realistically items degrading would mean a real representation of damage, such as tears, chips and so on - to various parts of the item in question, much like with the dwarf injury system. Tears can be sewn shut, holes can be patched - and certainly were, in medieval times.
Degradation also shouldn't break the physical law of the conservation of energy: when you have a broken sword, the blade is still on the floor - and a blacksmith can repair it by reforging. A piece of armor with a puncture hole still has the same amount of material: it's just bent to the direction of the applied energy.
Finally, I'll leave this here:
http://videos.howstuffworks.com/discovery/32918-mythbusters-slicing-a-sword-video.htmIts a test done by Mythbusters about what happens, when you try to cut a sword in half with another sword.
Thank you for reading, and sorry for the negative tone of the post.