Once attached to an army, gear changes the appearance and stats of your troops. The more rare the gear, the tougher they become. Gear can be found, purchased, and crafted as you may expect. You have to purchase the civilization with real-world money in order to be able to equip the very best items, however.
And if you're curious about Age of Empires Online's pricing structure, ShackNews has the full skinny. Some of the purchases are merely cosmetic, although it looks like there's bad news for those looking to avoid a "pay to win" scenario: "Unfortunately, Microsoft's approach to monetising Age of Empires Online seems to be one of placing non-paying players at a significant disadvantage."
Age of Empires Online is slated for an August 16th launch. You can watch the dev diary on gear for a chuckle or two after the jump!