Armor should get damaged with use

Yea, I like your idea .Pixote. The state of the armor that drops is dependent on the death animation, which itself it dependent on how much overkill you did to the NPC. This replaces my arbitrary % chance with real game metrics. I think a scripter could take both our documents, merge them, and implement pretty good armor drop / armor deterioration mechanisms.
 
I'm against the lootable armor... It's way to complicated. Just make player's armor destroy itself after certain amount of damage. Unless repaired. And you shouldnt' be able to repair it yourself, but only take it to the town and get it repaired... It's the system that's been used in so many games and works fine (Diablo for example).

Adding lootable armor and ability to repair it yourself would mess the game to much in my opinion.
 
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