Armor is an attribute of all armor class items: head, torso, arms and legs. It reduces the damagetaken from Physical attacks - this includes attacks with all types of melee weapons as well as bows, shields and most weaponless attacks.
When a hero or monster receives an attack dealing Physical Damage, first off, a location on the target's body is chosen randomly. For the hero, the chances to hit a particular body location are as follows: 40% of the attacks go to the torso, while arms, legs and the head each have a 20% to get hit. If that location is protected by some piece of armor, it reduces the physical damage taken. If not, the target takes the full physical damage from the attack.
Next, any Physical Damage taken up to the armor value of your armor is reduced. Mastery skills that add bonus armor add it to ALL locations. Any damage in excess of the armor value in a given location is taken fully by your character.
Physical Damage reduced by armor is reduced by 66%. That's right, armor does NOT fully soak damage. Also, Pierce Damage completely ignores armor. This property is known as 'Armor Absorption', and if you check the skill trees, you'll notice that several skills can boost this 66% Armor Absorption value, greatly increasing the power of equipped armor ( Defense, of course, has a Tier 1 skill that can raise this modifier ).
Think of armor as 'physical resistance', in the same way that resists lower, but do not fully eliminate non Physical Damage ( indeed, all resists are capped at 80% in any case ), armor can soften damage taken, but not eliminate it fully.
- +XX Armor modifiers found on items other than armor (like weapons, jewelry or shields) and from skills add their Armor value to all locations. Same thing counts for +XX% Armor Protection modifiers.
- +XX% Armor Absorption increases the amount of damage absorbed by armor. For example, with 6 skill points spent in Defense Mastery's Tier 1 skill Armor Handling (+16% Armor Absorption), the absorption of all armor is increased from 66% to 76.56%.
- The hero is attacked with a weapon which deals 45 Physical Damage. The attack goes to the hero's arms, which are protected by bracers with 30 Armor. The bracers reduce the damage by 66% of their armor value, which results in a reduction of 20 damage. The remaining 33% (10 damage) as well as the damage not soaked up by the bracers (15 damage) are both dealt to the hero.