Armor is directly deducted from the damage. This means that when a unit with 3 armour is hit by an attack of 5 damage, it only loses 2 health points (Attack damage of 5 minus the armor of 3 equals 2 lost health)
Note:
Armor is deducted from EACH source of damage, meaning that if more than one unit attacks the same unit, that has armor of 3, then each attacking unit would do 3 less damage to the defending unit.
