Definitely, the majority of the better items are either quest rewards or drops. Some of the good ones are also crafted, but apparently this peters out in the end-game due to absurd material requirements.
That said, yes, the majority of top-tier items are drops from powerful foes. Many of those are in instances, but some are not... I have in mind a particular wyvern in the (relatively low-level) Stonetalon Mountains that I hit up whenever I found him, he dropped good stuff for me.
"The devil's greatest trick is to convince us that he does not exist."
Evil is real. Aku soku zan.