I prefer a third option: Armor as penetrative divider damage reduction - armor has a value that gets multiplied by a weapon's penetrative value to result in an effective armor value that reduces damage. I'd use the critical multiplier as the penetrative value instead of using it as a crit multiplier.
I also like the use of hit points, not as a "subtract until dead," but as a "compare damage taken to multiple set-points (multipliers) of your base hit points that result in varying damage effects, with an additional similar level of damage taken increasing the damage effect to the next level."
But - I also tend to prefer house rules where weapons do a fixed amount of base damage (typical 1-2 points for a knife, about 5 points for a sword, etc.) with a margin of success resulting from the dice roll added to the damage (i.e. need a 10 to hit and get a 12? add 2 to the damage you do), and where a margin of success of 5 or more is a critical success.
Ideally, I'd turn D&D into a dice pool system where you'd have combat skills, with more skill ranks equaling more dice being rolled.
So - an example would be a guy wearing chainmail being attacked by a guy with a sword.
The sword would have a base damage of 3 and a penetrative value of 2. The guy wearing chainmail would have an AC of 2 (I'd divide current AC values by half), so the armor would stop 4 points of damage.
The average guy could hit but not do any damage if he just hits. Beats the roll to hit buy at least 2 and you'll do a single point of damage. Beat it by 5 or more and it'd be a critical success, doing twice the total amount of damage.
Using a dice pool system, I'd also make each additional die that is a success add 2 to the margin of success (i.e. need to roll a 10 or better and 3 dice are a success, with the most successful being 3 better? your margin of success is 3 + 2 + 2), resulting in (the above example) 10 points of damage.
But in order to make this work - I'd make base hit points only a factor of STR and CON, and have the set-points be 1 pt of damage, base, base x2, and base x3.