Armor Class is how well you are defended. It is a culmination of your actions, your base abilities, and the armor you are wearing. The formula for your Armor Class is:
For example:
A warrior wearing heavy steel armor with a DEX of 12 (+1 Modifier) will have:
If he were also a werewolf, he would have:
You can find a list of all common material types and their bonuses to AC's at Item Make Bonuses.
There are four main types of armor, each with its own advantages and disadvantages. The heavier the armor, the harder it is to do more dexterous things like jumping, running, or dodging.
Unarmored: This is your base clothing. You get no AC bonus and no Armor Penalties.
Light: This is partial armoring. You get +2 AC and -1 Armor Penalty.
Medium: This is almost full armoring. You get +4 AC and -2 Armor Penalty.
Heavy: This is complete armoring. You get +6 AC and -4 Armor Penalty.
Armor inhibits your ability to do these following checks, and you should subtract your armor penalty from these rolls:
Heavy Steel: +8 AC, -4 Armor Penalty
Light Adamant: +7 AC, -1 Armor Penalty
Medium Imphide: +5 AC, -2 Armor Penalty