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The ARMOR skill represents your ability to absorb damage, while most races and professions start with a tiny amount of natural armor the bulk of your ARMOR rating will come from wearing items and using Abilities or Spells.
Having high armor will improve your chances of absorbing more damage from an enemy.
Formula: Damage Absorbed = (ARMOR / 10)
This means for every 10 points in this skill you absorb 1pt of physical damage.
The DEFENSE series of skills are used in addition to this skill to determine how much damage is absorbed in combat.
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