During the development of Windows, the User Research team tried out an early build of some proposed changes on volunteers from the general community. During one of the tests, they invited the volunteer to just play around with a particular component, to explore it the way they would at home.
The usability subject scrolled around a bit, admired the visuals, selected a few things, and then had an idea to try to customize the component. He fiddled around a bit and quickly discovered the customization feaure.
To celebrate his success, he proudly announced in a sing-song sort of way, "My pants are fancy!"
That clip of a happy usability study participant gleefully announcing "My pants are fancy!" tickled the team's funny bone, and the phrase "My pants are fancy" became a catch phrase.