First:
Weapons/armors should not drop off being defaults even if they are 100% damaged. That's annoying. We are also required to keep 3 extra windows open (smitty, weapon, and armor items) and to refresh all after damage. There's now too many windows open for boss fighting and that's not fun.

Second,
Armor damage should be percentile based and 100% damage should not happen too often. I would also like to see the current damage % in profile under "Weapon and Armor in Use" section.

Third,
To make things interesting, you could drop off some damage/defense from worn armor/held weapon when they take damage. That could also serve as a hint for us when combating that our items might be damaged.

Fourth,
I second Tanada's suggestions