I hear this phrase ALL the time. It disturbs me greatly, because I have a few family members who are developmentally delayed. I cringe to think that someone would ever say this phrase in their presence.
Here's a fabulous blog post on the topic. Please take a moment to check it out.
This PSA, selected by my students as one of the three options they may choose from for a analysis assignment, further explore the issue of saying, "That's so ____" ("gay," "retarded," etc.).
Our children are listening to us. Whether we utter these phrases or whether or not we stand up to those who do...they are listening, learning, and will repeat.