Okay guys, I’ve done some tweaking, and here’s what I got…
As per page 166 of the PHB, a suit of chainmail has 25 hit points and a Hardness rating of 10.
When an attack is successful as a touch attack, the armor/shield is struck and suffers any damage beyond its Hardness rating. The character takes no damage, but their armor/shield takes a beating. This makes armors/shields made from adamantine or mithral very nice, since their Hardness ratings are much higher.
When an attack is successful to damage the character, the armor/shield takes 1 (one) hit point of damage and the rest is applied to the character (regardless of Hardness). So, if an attack deals 12 points of damage, 1 point goes to the armor, and the character suffers the remaining 11 hit points of damage. If the armor/shield is magical, the 1 point is still subtracted, but unless the magical rating is equal to the magical rating of the armor/shield, the armor takes no damage (see below).
For every five hit points of damage a suit of armor/shield suffers, it drops a point in armor bonus rating. This degradation can be repaired as per the Repairing an Item rules in the Craft skill description. Each successful use of the Craft skill repairs the armor up two armor bonus point.
Let’s take an example. Thorik, a 5th level dwarven fighter with a 10 Dex, full plate armor and a heavy steel shield has an AC of 20. His touch AC is 10. On an attack roll of 10 to 19, his armor is getting battered around, but he remains safe in its shell. Damage is applied to his full plate or his heavy steel shield (his choice, he could even divvy the damage up between the two) after a Hardness of 10 is subtracted.
Thorik’s heavy steel shield has 10 hit points and a Hardness of 10. Once his shield is reduced to 5 or less hit points, its armor bonus drops to +1. This reflects that shields, historically, didn’t last very long in an extended combat.
Thorik’s full plate has 40 hit points and a Hardness of 10. Again, for every 5 points of damage his full plate suffers, it drops a point of armor bonus. It would cost Thorik around 300 gold pieces to repair two armor bonus points.
Masterwork armor/shields are designed for better weight distribution, and as such do not grant any bonus in regards to armor damage or degradation.
Only a magical weapon (or the equivalent) equal to the magical bonus of the armor or shield can damage it. So it takes at least a +2 weapon to damage a +2 suit of armor or shield.
let me know what you think?
cheers
[edit: I changed the Craft skill to repair two points of armor bonus with each successful skill check]