I very much prefer Armor to provide Damage Reduction. (I actually go with both Damage Reduction and Damage Conversion...)
I have a couple of different means of bypassing it, as The Gneech recommends-- I allow characters to take a -4 penalty and a standard action to completely disregard manufactured armor for a single attack, and I desginate several weapons as "armor piercing", removing the DR component of the armor.
edit: I also use a variant of Class-based Defense bonuses, mimicking Poor, Medium, and Good saving throw progression.