I use the star system in two ways :-)

The quick and dirty version:
(How many times a week would I be willing to listen to this song?) == (Number of Stars)

The more thoughtful version:
0 Stars = Not yet rated
1 Stars = This is crap, why is it taking up space?
2 Stars = This is crap, but at least it increases my song count!
3 Stars = This is just OK
4 Stars = I like this.
5 Stars = I really like this.

Mine-

0 - Not rated or not worthy of rating (I should probably delete)
1 - I'm keeping this around for a reason
2 - Good, but not my favorite
3 - A great day to day play
4 - I could listen to this everyday
5 - I can't get enough of this song!

I judge star ratings based on how I would react if the song came up on a random play list.

0: Unrated, purposefully or not (I leave my mostly orchestral/instrumental soundtracks unrated)

1: I don't like this song. If it comes up on a random playlist, I'll probably skip it.

2: There's a 50/50 chance i'll listen to the song, or just skip it.

3: Decent enough. "Average"

4: Very good, I might just listen to this again.

5: Amazing. I could listen to this half a dozen times in a row, and not get tired of it.

Of course, I'm a real packrat when it comes to music, I'll keep an entire album in my music library, just because I like one song on the album.

This is really close to mine.

Mine, with a bit of expansion on japester's initial comment - after struggling with this issue, I decided to use the artist in total as the basis for giving a song 5 or down to 1 star. With that in mind:

0 = not rated, i.e., not listened to
1 = I probably won't keep until I reconcile that I sold my cd's in my library and
I want a perm backup for it before it goes
2 = Adds to my library, is listenable, also a song that hit Billboard, so someone liked it. My 'completist' baseline.
3 = Good song that I like
4 = Really good. I bought albums for this song
5 = Top of the Pop Crop. Never tire of these.

1 Star - Bad song, I probably listened it once to get it a play count and forgot about it, short/bad voice interlude
2 Stars - long and good interludes, songs I would listen to everyone once in a while
3 stars - Average. Would listen to occasionally. Also the default rating if I feel ambivalent about a song
4 stars - Good song, I would listen to it a lot.
5 stars - cream of the crop. I constantly remove songs from 5 to 4 stars when I feel I was too hasty.

The way I set up my weighted random play guides my decisions on the star ratings. I have a 5-star random that is 150 5-star songs not played in last 7 days. My 4-star list is 125 songs not played in last 30 days. The 3-star list is 100 songs not played in last 60 days. 2-star is 75 not played in last 90, and 1-star is 50 not played in last 180.

Then my weighted random play (now possible because of iTunes 4.5) is the 500 songs (150+125+100+75+50) on the five playlists combined. So the frequency with which I want to hear a song determines its star rating.

I split playing my iPod about 50/50 - - half for me, half for other people (family, friends), and don't necessarily want to subject others to my eclectic musical taste. Here's my system:

0 - not yet rated / listened to
1 - needs attention (re-rating; Genre incorrect; Comment to add). Normally, I change a song to 1-star on the fly with the iPod.
2 - my own *personal* faves (things I like that I don't necessarily think family / friends will enjoy)
3 - average. I like it; most family friends probably would too.
4 - very good. I really like it; family / friends probably would too.
5 - excellent! I love it; family / friends better (or else). . . .

My rating system seems complicated at first but it's actually very elegant.

Songs have 0 stars only if I haven't heard them or if I don't they aren't really "songs" enough to rate them (for instance 20 second long interstitial tracks on albums).

Everything I think is worth keeping gets at least 1 star, under the following guidelines.

There are twice as many 1 star songs as 2 star, twice as many 2 star as 3 star, and so on.

This means that I have approximately 16 one-star songs for every five-star song.

For example, I currently have about 1000 1 stars, 500 2 stars, 250 3 stars, 125 4 stars, and 60 5 stars.

I find this very useful, as it allows me to hone down on my absolute favorite songs ever (not just of this ephemeral moment).

Since the higher I go, the more selective I am, even 3 star songs tend to be very good.

Why keep a song if you'd never want to listen to it? Why rate every song you like 4 or 5 stars? Isn't there a difference between your favorite songs ever and the ones you like but don't love?