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Best way to think about it is that your enemy needs to roll a certain number on a 20-sided dice to hit you - his Thac0 is literally what your opponent and you need to roll on that dice 'To Hit Armour Class 0'. Now, if someone's trying to hit you with a Thac0 of 13, say, and you have an armour class of -4, he needs to roll 17 or more to hit you - that is, 13 + -4 = 17. His Thac0 is modified by your armour class. The lower your AC, the harder it is for folk to hit you. Likewise, if you have a Thac0 of -5, and you face a foe with an AC of -10, you need to roll 5 or more to hit him. See how it works?
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