I have personally witnessed children calling other children (usually males) gay

I was referring to the use of gay to mean naff; in which case it would be used impersonally, directed at a piece of music, a television programme or an event, all of which could be said to be gay (or rather totally gay in the South Park speak of a decade ago) simply implying they weren't very good, rather than in any way homosexual. It follows that gay might be used in this sense as personal attack without the implication of homosexuality, though perhaps I am drawing too fine a line here. It is kids we're dealing with here, acquiring the terminology without being fully appreciative of the wider implications or the etymology, actual or otherwise, of the words they use, however so complex the actual usage, much less the cultural baggage they carry.

That said, Homophobia was rife when I was a kid (b. 1961); as I recall it came in whispered rumours concerning certain celebrity figures whose glam androgyny was indicative of something entirely unnatural and unwholesome. Back then the word of choice was puff - as in such-and-such a (male) person is a puff. We would use it indiscriminately, simply because it had the power to hurt any red-blooded working-class heterosexual male even if their balls remained undropped. Sapphism, as I recall, was less of a concern, however rife the speculation on which members of staff were lezzas, and upon what evidence such speculations might be based...