Kylde, does upgraded armor take over the usual stuff equipped or does it count as a backpack item?
New armor takes over originally equipped armor. The only exception that takes a backpack item spot (that I recall) is the vest that is available very early on. The vest sucks but you can stack the defense bonus from using the vest WITH the armor.... If memory serves the vest only adds like +4 health or something which isn't too helpful later, but earlier on in conjuction with the first armor upgrades it can be pretty useful.
If there was an upgrade to the vest that takes a backpack spot I never got it.