So I asked Mahrin Skel (a world developer, for those of you not familiar with him), and he replied:
"Effective AF is all the combat algorithm looks at, if blue gear is giving better AF than yellow because of higher Quality, the blue gear *is* better. I've tested this extensively, 50 percent quality 30th level armor gives the same performance as 100% 15th level armor of the same type (assuming you are 30th). We're going to be changing the right-click item info to display effective AF so people are more aware of this."
I replied with a look of confusion. There are two kinds of AF? What the heck? He gave a longer explanation, with tons of detail:
"Okay, I'm going to have to talk in math here."
"Effective AF" is derived from base AF (the number currently displayed on right-click). Every armor item has a base Armor Factor, base AF divided by 2 equals Item Level for everything but Cloth, where AF = Level. But when you're in combat, the base AF is affected by Quality and Condition. Quality affects both the chance the armor will completely absorb the blow, and the amount of damage you take when it does, so the impact of quality "double dips". Condition only affects the damage taken. So "Effective AF" equals Base AF times Quality squared times Condition.
The "ArmorFact" field on the character display has always reflected this effective AF rather than base AF. Soon, right-click will also show effective AF, and base AF will only be shown on Shift+I."