This came up in one of the numerous Swashbuckler class threads.
The complaint is that how hard a character is to hit has no bearing on their actual skill (though one can argue that hit points already reflect this somewhat.)
My suggestion on how to fix this would be to base AC/Defense on the highest of either 10+Reflex or 10+BAB+Dex (remove Armor and Natural Armor bonuses completely from AC make them DR instead, but let everything else, including Shield bonuses, still apply to AC) This would let you reflect both "slippery" folks like Rogues and skilled combatants like Fighters as both being tough to hit.
Doing that, since AC/Defense is now based entirely on being able to avoid being hit, you can probably ditch Touch AC as a separate value. (Effective values of Touch AC would go up a bit for shield-using characters, but I don't know that that's necessarily a bad thing.) Certain spells/abilities may need to be modified a bit, though.
If you're already eliminating Touch AC, I would argue for eliminating a separate flat-footed AC value as well to maintain the streamlining. That, and while flat-footed as a concept makes good sense and characters caught off-guard should definitely be easier to hit, I've never understood why a quick character is effectively penalized harder than someone who is slower. I'd probably pull something like the +2 to hit vs. flat-footed opponents form 4E.
Of course, armor as DR also introduces other quirks to the system. You may want to allow weapon finesse to automatically grant Dex bonus to damage instead of Strength, or you may end up with the Dex-based types unable to actually cause any damage outside of a crit or sneak attack against armored foes. (Then again, this might be considered a feature rather than a bug, depending on the type of game you want to run.)
This is one of those things that I always like the idea of, but never the implementation of (at least not in this system).
It starts out looking ok on paper, but in practice it requires the entire combat side of the game to be re-balanced. It guarantees the supremacy of the full BAB classes in every form of combat since they're going to have significantly higher ACs, a better chance to hit, and generally better DR from armor. That may be a feature and not a bug for some, but reserve some pity for the already underpowered rogue in such a system.
Another wrinkle is in the bestiary. A lot of monsters gain all of their AC from natural armor, some of which is absurdly high, which gets weird depending on how your convert it to DR, and that is further complicated when monsters already have DR and whether you choose to stack DR or take the better value.
There's also the fact that a world of excessive DR/- pushes all combat into one flavor, that of the 2 handed power attack fighter (which already enjoys the major market share in most games) and shifts monks, two-weapon fighters, and finesse fighters from slight under-performers to totally obsolete.
That being said, I appreciate the suggestion as a concept, as I have in every variation of this sort of thing that has cropped up in 3.x, but in practice I've never liked the results. Other systems do this sort of mechanic better, and I don't think that will change without a complete overhaul from the ground up in combat, including weapon damages and combat scaling.
Thanks for the input. As you say, it would require some significant overhaul for a lot of monsters.
It would definitely work a lot better in a low fantasy campaign that mostly involved conflict with other humanoids. (In fact, if I ever get back to running a campaign in one of my game worlds that's designed around low magic/gritty military style stories, this might be a really good fit.)
Rogues would definitely have some problems. Might have to compensate by giving them a way to either increase their sneak attack dice or else ignore a certain amount of DR. Maybe something like:
Subtle Blade(Ex): Whenever a rogue performs a sneak attack with a light weapon or rapier, she can ignore an amount of Armor or Natural Armor DR equal to half her Rogue level (minimum of 1).
Something like that would definitely be needed, but it may also cause some other issues that require other things to be re-balanced. Any combat build that relies on a lot of small hits loses out with a lot of DR floating around, which is going to necessitate something like a melee version of "clustered shot" to compensate.
Another option, rather than applying armor towards DR, might be to turn it into a pool of bonus HP. Mechanically it will necessitate fewer changes than balancing around new DR values applied to everything.