When you mention "We have a Drow as well," what does that mean? In all honesty I don't know if I'd play a drow with the +2 LA that they are supposed to have so if they are paying that I don't see where you believe you should get a big discount to play a Lizardfolk.
Racial hit dice are essentially a really crappy class you're forced to take levels in when you play certain creatures. If you're playing a lizardfolk in a 3rd-level game, you start with no class levels, because all your levels are taken up by level adjustment and racial hit dice.
Does the +5 stack with armor? And I say we have a Drow, because they're considered to be stronger (they have natural resistance to magic as well as some spells once/day).
Natural armor stacks with normal armor - although full plate might cost a lot, a lizardfolk wearing it (with a +1 Dexterity modifier) would have an AC of 24 with nothing else on. Look up how bonus types and stacking works.
And why do you say it should be higher with no racial HD? I figured you started at level 1 either way and the 2d8 and feat were just bonuses.
While he'd start out with one class level (maybe; you could also play him with no class levels, since he has racial HD), he would NOT be a "level 1 character". The levels and feat are not a bonus - they're actually the lizardfolk's first and second character levels! That's why he has a base attack bonus, saving throw bonuses, and a high skill rank.
Does the +5 stack with armor? And I say we have a Drow, because they're considered to be stronger (they have natural resistance to magic as well as some spells once/day). And why do you say it should be higher with no racial HD? I figured you started at level 1 either way and the 2d8 and feat were just bonuses.
AC in the form of an "armor" bonus will stack with AC in the form of a "natural armor" bonus. Note that a Necklace of Natural Armor provides an enhancement to any natural armor the wearer already has effectively giving it magical skin like you could have magical armor thus it will stack as well.
Drow have a higher LA but they also do not have racial HD which also increase a character's level. The HD that lizardfolk have are part of the character's effective level. In your campaign you could have a 1st-level Drow, a 3rd-level human, and an unlevelled Lizardfolk and all would be considered 3rd-level characters when it comes to determining encounter difficulty, XP awards, XP requirements, and wealth. Level adjustment is NOT meant to be used all by itself but also considers the racial HD that go along with it. I don't want to repeat myself since I covered all of this recently so take a look at this recent thread about post #6 where I go and show some "higher level" creatures that have LA and how crazy you should need to be to think you could just play them as that LA without the racial HD.
As Tempest has mentioned the 2d8, feats, BAB, saves, and skill points a lizardfolk recieves are all part of its RACIAL HD to which you'd then add the LA to determine the effective character level.
