1. To be jolly, happy, spirited, good-hearted.
2. Homosexual (but more so in the male sense), as in being sexually attracted to someone of the same sex.
3. An adjective (increasing in use) to negatively describe something as crappy, disappointing, unfavorable, or undesireable.
Many gays (2nd definition) are struggling to earn full rights to this word, and don't take kindly to people using it in the way described by this definition. However, they have to get over it. It is not everyone's intention to use this word to negatively describe something, because they feel homosexuality is wrong. It's just becoming another definition of its own, and gays will just have to deal with that.
But to avoid this kind of conflict, it is recommended to spell it as ghey, a spelling of "gay" made up just for this sort of use of the word "gay".
2. Ellen DeGeneres is attracted to women exclusively, making her gay.
3-A. Gas just went up fifty cents a gallon over the weekend, that's so gay. (WRONG)
3-B: (same as above)...that's so ghey. (CORRECT)
(PS) Watch "that's so gay" by Chris Crocker on YouTube, and hear him bitch about it.
2. (infrequently used): Hey, you know Josh? I just heard he's gay. typically, the sentence wouldn't use the term gay but instead use flamer or fag.
Usually highlighting an items lack of the normal qualities expected from quality items of that type.
300 was a really gay cartoon movie. But Alien is a gay movie too because it is so old and outdated. Real chick-flick stuff.
All the prizes at the carnival shooting booth are really gay; but my girlfriend like it.
Blue Boy and Seventeen are really gay magazines; but they get my sister's girlfriends worked up.