You can also use a Daedric weapon, which you'll be able to repair. I had the same problem for awhile, but finally stole a Daedric shortsword off the guy who owns the haunted house in Anvil.
Yeah, I REALLY wish I was playing this on PC so I could get mods for free. I would really like to have the Knights of the Nine and the Shivering Isles going as well as the other little official mods. I need to upgrade to the GOTY before too long.
I have toned down the difficulty a bit and feel pretty good about it. When I first started I had it maxed since I figured I was a pro at Morrowind and didn't need no stinkin favors. After probably 30 hours of being frustrated I remembered the slider and put it at about 2/3. Now I can handle most things, but Goblins and anything that uses magic are still problems. Goblins just block so often and they're freaking fast, I think that's why I have so many problems with them. I think I need to look into getting some stuff enchanted, as I haven't done any of that yet (96 hours in).