The way it works right now is like this (using the warrior's starting tunic as an example)..
Starting stats: 4 armor, 5% crush, slash, and pierce resistance
If you combine it with the anvil enough times (even without leveling or changing your crafting skill level), eventually it becomes 5 armor, 10% crush, slash, and pierce resistance.
But you have to do it many times. Do it once and you'll get +5% to crush resistance. Do it a couple more times and you'll get +5% slash resistance. A few more times and you'll get +5% pierce resistance. A few more times and you'll get +1 to the armor.
Whether it improves beyond that with additional points in the crafting skill, I don't know. I just feel that whole setup is extremely odd; it keeps the player throwing the same tunic on the same anvil 20+ times trying to max it out.
