Excuse me, but how do we know it was a cross-dresser? Some females have facial hair as they age, haven't we all seen the Halloween caracature of the witch with the hairs coming out of warts? And getting Larry King's gravelly voice to do the Ugly Stepsister was no more of a gender-bender than getting Nancy Cartwright to do the voice of Bart Simpson. You're just going for an effect, and the idea was to make the Ugly Stepsister look ugly and sound ugly!
I can at least see the point about Pinocchio with the women's underwear looking like a bit of cross dressing, but in my opinion, it was mostly trying to make fun of thong underwear, which is pretty silly stuff, when you think about it. Every little boy has been told not to wear his sister's underwear, and vice-versa, so to have a puppet that is carved to resemble a boy wearing female undergarments that are silly to begin with, is just designed to be funny.
I saw Shrek 2 last weekend and I must admit it did seem to subtly promote a pro-gay agenda. There were two characters that especially seemed gay - Kyle the driver and the clerk at the perfume factory. The she-male disturbed me too.
Stop being sane and reasonable! Fly off the handle! Jump to conclusions!
It may be funny, but it is not an appropriate joke for little kids. It would be funny as a basis for a Seinfeld episode or something. It would be funny on Jay Leno. But surely we can keep the jokes clean around the kids.