I noticed the original graph wasn't proportioned right so uploaded a new one. This one should give a more accurate impression (I made it at www.fooplot.com)

Nice graph. What's it mean? Armor prevents some damage?

It is max damage as a function of armor at 4 different attack levels (5, 10, 20, 40). More defense is always better but there are diminishing returns on defense. Every additional unit of defense has slightly less benefit than the one before it.

Say unit A is attacking unit B:

If the defense of unit B is equal to the attack of unit A then max damage will be 1/2 of attack.

If the defense of unit B is 2 times the attack of unit A then max damage will be 1/3 of attack.

If the defense of unit B is 3 times attack of unit A then max damage will be 1/4 of attack.

If the defense of unit B is N times the attack of unit A then max damage will be 1/(N + 1) of attack.

Moving in the other direction ...

If the defense of unit B is 1/2 of the attack of unit A then max damage will be 2/3 of attack.

If the defense of unit B is 1/3 of the attack of unit A then max damage will be 3/4 of attack.

If the defense of unit B is 1/4 of the attack of unit A then max damage will be 4/5 of attack.

If the defense of unit B is 1/N of the attack of unit A then max damage will be N/(N + 1) of attack.