Attacker's Final Damage = (Attacker's Damage^2)/(Attacker's Damage + Defender's Armor Rating)
The difference, for the mathematically minded is this:
Let's say you have Armor=100. In Skyrim, this will make your survivability increase some ~20% or so (i.e. ~20% damage reduced; you get 80% at the cap 500+ armor). This is independent of who is hitting you for how much damage: rats or giants, you get the same ~20% increase to your survivability.
In Morrowind, someone hitting you with 10 raw damage would only deal 1 effective damage (1 = 10 * 10/(10+100)) and someone hitting you for 100 raw damage would do 50 effective damage (50 = 100 * 100/(100+100)).
I.e. you would nearly immune to rats and would be squished by giants.
Relatedly, armo CAPS in skyrim.
With smithing and armor perks, you hit an armor cap ridiculously early.
With Morrowind formula there would have been no cap, only a slowing of returns which becomes vital once someone heavy starts hitting you.
Unfortunately, this isn't a simple matter to mod: all damage balances are made according to the same formula. The entire damage, hit point balance, as well as destruction damages need to be tweaked to get a sensible balanced system like in Morrowind.



GAH!