This phrase usually means "that's sexy" although it can also mean "that's cool."
In 2005, celebrity Paris Hilton began using "that's hot" as a catch phrase, increasing the popularity of the less common "that's cool" meaning.
The more traditional "sexy" meaning:
Chad: Check out my new miniskirt.
Derek: That's hot!
The recently popularized meaning:
Chad: Check out the celebrity phone numbers I downloaded from some the net. Some stupid famous chick had them on her mobile phone and they got stolen.
Paris: That's hot!