Armor Class, or AC, is a measure of how likely one is to be hit when attacked. Unlike in Advanced Dungeons & Dragons, higher AC is better; presumably this is the reason Troika chose to point this out specifically in the manual (although higher AC has been better in D&D since 2000, with the release of Third Edition).
Base Armor Class is decided by one's Dexterity. Various items, especially armor of various sorts, add to it. Dread Armor adds more AC (40) than any other individual item.