Units have 2 values: Readiness and Strength. Readiness decreases when a unit moves, fights etc, and increases when a unit rests. Losses to Readiness are temporary.
Units with 0% Readiness have 50% (?? Can't remember exactly) of their Attack/Defense values.
Strength is the basic number of men/tanks etc. Strenght never increases, only decreases. Losses to Strenght are permantent.
The relationship between Strenght and Attack/Defense is linear. A unit with 50% strength has its Attack/Defense values halved.
When a unit suffers casualties, both its readiness and strength are reduced. If a unit has high readiness, most of the damage is taken from its Readiness. If a unit has low readiness, most is taken from its Strength.
The idea is that units can suffer some damage without permanently affecting their combat power (for example, tanks can be recoved and repair), whereas if a unit is exhausted, then casualties cut into the bone, doing permanent damage.
If someone runs their units into the ground, then s/he'll pay for it!
Units are destroyed if their Strenght is reduced to a certain value (this value depends on Quality...Conscript units are destoryed if Strenght is < 25%, and Elite is < 5%)