I prefer modifying the current v3.5 system to make it as easy as possible to transition. I don't think it's necessary to incorporate percentages or HP additions, although it's certainly one interesting option.
Here is how I would do it. Give armour two values, AC and DR. Split a character's AC into two values, which I call Dodge Class and Armor Class but perhaps could be better named.
Dodge Class represents all factors that go into AC that help a character *avoid* being hit. Dex, luck, insight, maybe deflection, shields, and so on. This is the *base* AC, in a sense.
Armor Class represents protection from armour, and is added *on top* of Dodge Class.
Thus, a character with a dex of 14 and +2 armour has a Dodge Class of 12 and an Armor Class of 14. Armor Class is always greater than or equal to Dodge Class, because it stacks on top.
The damage from an attack roll is treated differently depending on how it is, relative to the receiving character's Dodge and Armor Classes.
(1) If the attack does not beat the Dodge Class, the character has avoided the blow.
(2) If the attack beats the Dodge Class but not the Armor Class, the character has managed to take the blow on his armour (or, from the other point of view, the attacker managed to hit but not to find an opening in the armour). The blow is dealt, damage is calculated, but *damage resistance applies from the armour.*
(3) If the attack beats the Armor Class, the character did not avoid the blow nor did he take the blow on his armour (from the other POV, the attacker managed to hit the character and find an opening in the armour). Damage is calculated and taken without damage resistance from the armour applying.
The main change to the existing rules that is needed with this system, is that a DR rating must be invented for all pieces of armour. That will take some playtesting.
The only other change is to consider how other methods of adding DR interact with standard armour-DR. Adamantine armour, for instance, would probably just add to the DR of the armour. But what about a character with inherent DR who also wears armour, such as a barbarian? This might lead to "two" DRs, one of which always applies, and one of which only applies in situation (2). That is a complication, and I like to avoid complications. Still, it might be easy to rename the armour DR in order to treat it conceptually differently from other forms of DR, thus allowing for easy mental compartmentalization.
Thoughts?