[Etymology]

The first definite use of the term [gay] to mean [homosexual] came in [1929], a [double entendre] sung by [dandy|dandies] in [Noel Coward]'s [operetta] [Bitter Sweet]:

Pretty boys, witty boys, You may sneer
At our disintegration.
Haughty boys, naughty boys,
Dear, dear, dear!
Swooning with affectation...
And as we are the reason
For the [gay nineties|"Nineties" being gay],
We all wear a green carnation.

([Green Carnation] is the name of the song, and an [Oscar Wilde] reference; he was famous for wearing them.)

The term was probably used this way for some time before, though, and had had a sexual connotation since at least the 1800s, when it meant promiscuous (a [gay house] was a brothel). By the turn of the century ([the plot thickens]) a [geycat] was a young hobo, perhaps in an implicitly sexual relationship with his older charge.

[Gay]-meaning-homosexual began to be used by non-gays only beginning in the late 1960s, concurrently with an acknowledgement of the existence of homosexuality and, in parts of the [counterculture], a relative acceptance of it.

[Ghey]

Throughout the last few decades, of course, [gay] was also a general-purpose [perjorative] (more common as [fag] or [faggot]). Being homosexual was taboo until very recently, and its undesirability [axiomatic] to most people; calling someone [gay] was often less a serious accusation than a more potent equivalent to [you're stinky!]. (In my early-'90s elementary school, [jinx] was accompanied by the admonition, "if you talk, you're gay!")

Fag, like [nigger|its racial equivalent], is dropping from general usage, but the perjorative [gay] remains (though mostly not in reference to someone). In parts of the U.S., it's the predominant usage, ubiquitous among young people.

And so we're faced with a dilemna. Most of these kids, raised in an era of increasing tolerance toward gays, don't intend bigotry. Some have gone so far as to type the word out as [ghey] to further detatch it from former usage. The "language evolves, deal with it" crowd paints the evolution of the term simply --

happy
homosexual (with regard to a person)
lame (with regard to a mode of thinking, style, computer game, etc.)

-- but of course, it's not simple.

[Gay], to non-gays, always meant both "homosexual" and "all manner of [ungood]"; the two were equivalent.
The non-negative, homosexual gay can also be used to refer to non-persons -- a hairstyle, maybe, or a [Oscar Wilde|Wilde]-eqsue worldview. (I'm ambivalent about assigning meaning this way, but people certainly do it. There are many traits overrepresented among gay people that have nothing to do with being attracted to members of the same sex[gaydar|.])
What happens if the perjorative gay colonizes all the available mental terrain as the homosexual gay did before it, permanently monopolizing the word? [Homosexual] can't be fallen back on; to many gays, "gay" is [homosexual|not] just a less-formal synonym.
The specific meaning of the modern kid-used "gay" also bears examination: it has exactly the connotations of typical homophobic stereotype: spectacularly uncool, totally lacking in self-awareness.

Gay (idea)