In short: I think that AC is inherently flawed, as it is a binary system only used to see if you completely miss someone. AC should be 2 numbers, touch and flatfooted. Armor should grant DR, not AC.
Actually, I wouldn't call it
flawed, so much as
simple. The biggest sin of AC is that it can be bypassed so easily at later levels that its pretty sad. It's nice, and even necessary, at low levels.
The advantage to a binary AC is that it's fast to figure out. On the short run, DR looks nicer, but on the long run, it's functionally identical to AC. Basically, under both models, your armor exists to
make it take longer for you to die. AC does this by having attacks miss, so it takes more attack rolls to kill you. DR does this by making you take less damage, so it takes more attacks to kill you. The only real difference is that AC is a bit more swingy than DR in that a couple of good or bad rolls can mean more or less damage than expected on average.
Anyway, I'm getting a bit off topic.
It's not a bad model, and I was going to suggest something similar. Scaling DR is very important. That's the biggest problem with DR currently is that you get flat rates. So, DR 5/- is
awesome at low levels, and is stupid at 15th level. Sadly, there are lots of abilities that just give DR 5/-, and they're made to be really expensive, and there's not a lot to offer affordable DR at low level. So, what can we expect from this from a full-BAB fighter:
Light Armor:Basically, the DR is a freebie here. You wear light armor as a fighter either because you need the mobility or because you have to (multiclassing or money restrictions). The DR is gravy.
Medium Armor:So, if you buy scale mail at 1st level, you end up with DR 1/-, which isn't bad at 1st level. You're trading off DR for speed for a chain shirt. Since you're already taking a movement penalty, upgrading to heavy armor isn't that big a deal, so long as you don't need to run.
Heavy Armor:If you can pick up splint mail at level 2, you get DR 3/-, so you'll probably do that. Full plate at level 3 will bring you to DR 4/-. If you're normally focusing on AC, you'd do this anyway, so the DR is a nice boost. DR 4 at 3rd level should be noticeable, especially when fighting mooks. This is still a level when DMs like to throw lots of orcs or goblins at the party. At level 5, you're DR is 7, and that negates the Str bonus of a troll's claw, and the average damage of a troll's bite. You'll be pretty hard-core against guys with multi-attack routines.
Exotic Armor:You spend a feat to get the AC boost and an effective upgrade of another +1/2 BAB on DR compared to heavy armor. It could be worth it. DR 20/- at level 10 is nothing to complain about.
Conclusion:Medium armor is already next to useless in most situations, and this would probably enforce that. It's not a
big deal, but it will happen. Other than that, it makes withstanding full attacks easier. Once people get attacks to bypass armor, you'll run into the usual problems, but overall, this seems like a nice improvement. If your goal is to give incentive to wear heavy armor, I think this does that.