Making gear? Cool.
Item degredation? Sucks. Play Fire Emblem and see how ridiculous your legendary metal weapons disappear after 30x swings.
Try this:
Sharpening
Similar to a wand having limited charges, this merely boosts the effectiveness (stats) of a weapon. Each use uses up a charge, until it goes into a normal state. Normal states (of a sharp weapon) can further degrade into dull. So:
1. Dull (-boost) (0 charges)
2. Normal (300 charges)
3. Honed (+boost) (# of charges, based on blacksmith, items used, metal of sharp weapon, etc.)
Keep using your same bladed weapon over and over on foes and opening up chests, and you get a club.
This gives us reason to see a blacksmith whenever we're in town. The above relates to a bladed weapon. Weapons like metal hammers wouldn't really need to be maintained, because they're hammers.
For more complex weapon items, let's say crossbows, they have working parts and must be maintained, and can certainly be broken.
Maintenance
1. Broken (0 charges/can't be used)
2. Faulty (-boost) (150 charges)
3. Normal (300 charges)
4. Well Maintained (# of charges, craftsmith, items used, etc.)
5. Peak (+boost) (ditto)
n. Ethereal (can't degrade)
n. Special (can't degreade -- whatever lore reason the writers come up with)
Non-weapon equipment:
1. Broken
2. Dented/deformed (depending if metal or non-metal)
3. Normal
4. Well Maintained.
Another complimentary, simple idea is Tempering. Tempering can increase the number of charges of Maintenance or Sharpening on an object. So an Iron Sword can be tempered in Steel, but still be an Iron Sword, just now have a greater pool of (Normal) charges. It might also offer some resistances to being broken, or certain effectiveness against various weapons/defences.
If you really want to get fancy, whereas weapons do in fact break, that would involve a series of spells, counter-weapons, and blunt-force weapons that are designed to shatter weapons and armor, like hammers.
And if you want to get really fancy:
http://medieval.stormthecastle.com/armorypages/sword-breaker.htm