Underwear is given when finishing story quest Phantom Menace. Underwear coupon is also given upon reaching level 65.
Underwear is especially powerful when worn by low level character. It gives around 3000 HP more which is significant if character has around 10 000 HP. Underwear can be bought from Trade Broker very cheaply if player doesn't want to finish the quest.
More underwear can be got by collecting Goldfinger Tokens. 80 pieces will give a Undergarment Bag (in EU Laundry Basket) that contains a random innerwear.
Power and crit factor underwear is most sought after and most expensive. Healers can also pick HP underwear.
Basic underwear design is grey "Potato Sack". Newer sets have much sexier look. However underwear is hidden under armor and costumes. There exist Self-Confident / False Modesty Potions (in EU Potion of Unveiling) which makes underwear visible. There are also some joke potions that when thrown at character show them on their underwear.