In Oblivion and Morrowind, your equipment would get damaged through use until that condition meter expired and your item disappeared to your inventory.
What I would prefer is that your equipment would begin to show visible damage (chips, splinters, dents, cracks) and then finally break in two, but could still be used only in a more limited capacity.
Like if you were using a sword and were striking it against hard objects like shields and armor it would begin to chip as it was near breaking, then finally break in half, leaving you with a stumpy sword that has a much shorter reach, but could still be used.
Also it would be great to be a high level character and slice a low level character's shield in two.