How about only enchanted items grow. Like say you get a Dagger that has a small enchantment of 2 fire dmg on strike (Morrowind!). The weapon its self continues to wear and break like a normal weapon, but the soul grows and becomes more powerful. So now you have a crapy dagger, that has like 30 fire dmg, so you could get the weapon ugraded. I dont think that the weapon itself should grow, that is just metal, but the soul of an enchanted weapon should grow.