I didn't really like the way Oblivion handled breaks and repairs. I'd be using a sword, everything was going fine, then suddenly I'm fighting a troll using only my fists... so later I whip out a hammer, hit my sword for a bit, and voila! Fixed. It worked, but there's room for improvement.
Instead of a 'health bar' sort of thing for your weapons, I'd like to see a chance of breaking every time it's used. Of course the probability would be extremely small, tiny, for anything other than certain circumstances. For example: when used to block a much heavier weapon such as an axe or war-hammer, the probability of your sword breaking would be much higher. The material of your weapon should also factor in, and how old it is. Maybe here we could have a health bar, but instead of the weapon breaking when the bar reaches zero, the probability of a break increases as the health decreases. Also I'd like to see my weapon break - I want the blade to shatter as I block a trolls fist, with fragments flying away and leaving me holding the stump. Even broken weapons should be usable - if the top half of my sword broke off, I wouldn't give up and starting using my fists. I expect the remaining part of the sword would still be quite sharp, so it should be still usable, although the damage should be far far less than a blade in good condition.
Apologies for the focus on swords, but that's what I find myself using mostly. Ideas on other weapons would be greatly appreciated Hammers and axes would be much more durable and harder to break, although the handle could break if used for blocking.
As for repairing: It should require specialist equipment. You should have to return to a forge, or hire a blacksmith to do the job for you. Factions such as the fighters guild should supply forges for their members, the player could also buy one for their home. If you're homeless and friendless, I suppose you'd have to pay for someone else to do it.