This condition is applied to an object, rather than a character. The object is sufficiently damaged that it is unusable for its intended purpose. The object provides no benefit to its user, and if used as a required part of an action, that action automatically fails.
A Damaged item can still be repaired. If the item loses this condition, it becomes both Dented and Broken.
A magical item that becomes Damaged will suffer a significant magical backlash, and will instead become Destroyed.
An item that is Damaged and that takes any further damage (by becoming Broken or receiving this condition a second time) will become Destroyed.