Armour reduces the damage done by any attack by the value that the armour is. This occurs before you subtract vitality points. So if you have an armour value of 3, you can absorb moderate damage without taking damage to your vitality.
This is a value which is equal to double your toughness for physical and double will for stun. It effectively represents your health but also the ability to take hits and yet keep going. When you are hit by something, which overpowers your armour, you lose vitality points.
Physical Vitality Points
When you take physical damage, which overpowers your armour, you lose physical vitality points.
Stun Vitality Points
Stun damage is exactly the same but is dealt with separately to physical damage. Damage over the amount of your stun vitality transfers to physical point for point. So, for example, Sanli is in a particularly violent bar brawl. He has been punched several times and is feeling quite woozy. He only has one stun vitality point remaining, he takes another hit which does moderate (3 boxes) damage to him. This means he is debilitated (as he has exceeded the amount of his stun vitality points) and he takes 2 boxes of physical vitality damage as well.
It is possible to recover vitality through rest or healing. You recover as many points as are equal to your toughness per day of full rest. Healing depends on the success of the check.
Losing Action Dice
Depending on your willpower, damage to your vitality causes you to lose action dice. This is cumulative with stun damage. You lose one dice for every time you lose as many vitality points as are equal to your willpower.
Provided you are conscious, in almost every circumstance you always have one action dice regardless of how much damage you have taken. However, your actions may be severely limited by the GM. The amount of damage (both physical and stun) you can take is determined by your vitality. Once you have lost all of your vitality points you are considered debilitated.