Ooh! A thread I can chime in on, 'cause I've got experience working with this!
I work something similar to the Wheel of Time rules, with some slight modifications. I use only three Defense progressions, mainly because I like to keep the Defense divisions similar to the other progressions (I have a moderate save progression, too.) Plus, the fourth one is just kinda wonky. Anyway, they start at +2, +3, and +4, and end at +8, +11, and +14, respectively.
AC - as written - is replaced by Defense. A character's Defense is equal to:
10 + Base Defense Score + Dexterity Mod + Shield + Size Mod + Misc.
Class bonuses for Defense stack, but, like in the Wheel of Time book, you incur a -2 penalty to Defense every time you multiclass. Since the lowest initial bonus is -2, you'll never "lose" Defense from this. (I'm thinking of changing it to a fractional amount (so that someone with eight levels in good Defense classes will act as an 8th level good Defense, not, say, a 3/3/2 character, who would have a net +11 Defense, +5/+5/+5/-2/-2. If I did that, though, I'd do the same to BAB and saves, and I'm too lazy.
)
Armor provides DR equal to it's original AC bonus. Yes, that can be a lot. However, the tradeoff is that someone with a lot of armor is far easier to hit - when wearing armor, your Defense is capped. Instead of getting the above as your Defense, you may only add up to of core armor's Max Dex Bonus to your Defense, though only from the categories "Base" and "Dexterity Mod." This is kinda hard to explain, so I'll use an example.
A 9th level rogue (with a good Defense progression) has a +8 Defense, and a 19 Dexterity (+4 mod.) He happens to be a halfling, and thus, has a +1 size modifier to Defense. He also took Improved Dodge (house-ruled feat) to add a permanent +1 to his Defense (misc. modifier.) He wears no armor, and thus has a Defense of 24 (10 + 8 + 4 + 1 + 1). Because he wears no armor, he has no DR. He's fairly difficult to hit, but when he *does* get hit...
On the other hand, we have a 9th level fighter (with a moderate Defense progression.) She's human, and has a 12 Dexterity (+1 mod.) Her class bonus is +6. She's using a large shield (+2 Defense), and wearing breastplate, which provides DR of 5/physical, and has a Max Dex of 3. Her defense bonus would be 19 (10 + 6 + 1 + 2) without the armor, but because of it, it is 15 (10 + 2 + 1 +2). (For ease of notation, we've agreed that the cap - Max Dex caps Defense and Dex Mod, which in this case would normally equal +7, to +3 - is always removed first from the Base Defense value.) Thus, she is is about 45% easier to hit than the above rogue, but takes a good deal less damage.
We're finding it works quite well for us. It does put more emphasis on Dexterity, since we've also made all attack rolls modified by Dex, as opposed to Str for melee, but no one overly minds that. Strength is still quite important, since most things have DR that needs to be punched through. Any effects that add damage (sneak attacks, elemental enchantments) are applied before the DR, and things that depend on a successful hit (such as poison) are negated if no damage gets through the DR. I'm pretty sure that's core rules anyway, but I thought I'd note it.
Overall, this system has a number of ripple effects. Combat, in general, lasts a little bit longer, as more things have DR. (Natural armor, for the record, counts as DR as well, not Defense. Deflection is Defense, as is Dodge and... well most things are pretty intuitive.) We don't mind that overmuch, as it's allowing for more lightly-armored fighters who aren't rogues with sneak attack. They generally hit more, and are harder to hit, but take and deal slightly less damage. Our group is balanced with both light-armored and heavy-hitters, and neither side is complaining, which I think is a good sign. Magic ignores DR, since by the core rules, armor would've been AC, and most spells that require a hit roll at all are touch attacks, which ignore that. We find that the group does a bit more grappling and the like than they used to - which, again, people don't mind, because they're using more tactics than before. I had them surround a heavily-armored fellow in my game recently, all grapple him, and then "peel" his armor off (ad-libbed rules for that,) before having a go at him, since they were having a hard time breaking through his armor otherwise. It was a neat feel.
