A white elephant gift exchange is a lighthearted way to have fun with your friends, family or work colleagues. White elephant gifts are traditionally gifts considered extremely tacky, or that do not fit the tastes of the recipient, and that are given by a friend or close relative (such as a mother-in-law) and therefore cannot be returned or exchanged at the store without potentially offending the giver. The thought behind a white elephant gift exchange is to give everyone a chance to rid themselves of these tacky gifts--and invariably gaining a new one!

[edit] Steps

Organize the event. Give everyone invitations, along with a description of what a white elephant gift exchange is. Tell them to bring along the gift and to wrap it up or put it in a gift bag.
Put all the gifts in an area where it will be hard for others to see who brought what. In other words, don't have your guest walk through the party crowd with gift in hand before you get to the pile of gifts. The idea is for people to not know who the gift is coming from.
Select who will open a gift first. You can roll dice, go by age, go alphabetically by name, or in a circle starting with whoever's closest to the door. Either way, figure out your system and have the first person choose a gift to unwrap. Feel free to crack jokes and make fun of the gift, since it'll probably be something no one would put on their Christmas list.
Decisions, decisions...

Have the next person choose and open a gift. Now this is where it gets interesting. The person has a choice of whether to keep the gift they opened, or to "steal" an already opened gift from a previous person. If they steal a gift, they take that gift and give their unwanted gift to the person they stole from. That person then gets the option of stealing from someone else. You can declare a gift "safe" after a preset number of times so it cannot be stolen anymore. Go to the next person in order and repeat. The exchange continues until every gift has been opened and the last person has kept their gift.

[edit] Tips

This is also known as a Yankee Swap or Dirty Santa.
A gift that has been stolen three times is considered "dead" and cannot be stolen a fourth time.
No one can steal back the gift that was just stolen from them.
While it is acceptable to re-gift an unwanted trinket, in practice many people end up purchasing new tacky items just for the party. The goal is to choose wacky, funny or entertaining gifts. If you're really stumped, just pay a visit to your local dollar store.
Some ideas for white elephant gifts include:
- Hideous jewelry
- Perfume or lotion with an unpleasant scent
- Cheap, ugly statues or other decorative knick knacks
- Weird art
- An obnoxious T-shirt or tie
- A poorly made, straight to video/DVD movie, preferably with the star being at the center of public ridicule (e.g. Britney Spears or Spice Girls movie)
- A book on a topic that is obscure and/or outdated