This is a situation that happened to me a few years ago, when my son was about 7 years old. We were at a friends house, and my son was playing upstairs with my friends two daughters. At one point, he came downstairs dressed up in girls clothing, acting all coy.
As a crossdresser myself, I was kind of shocked and disturbed by seeing this, but I tried to remain neutral toward the situation. I must admit, it was difficult to get my head around the old "like father, like son" adage versus thinking that a lot of boys probably do this at some point in their lives, with no further ado. Mix in with that the fact that being a CD isn't always the easiest of lives...
After a couple of minutes, he disappeared off again upstairs, and we never spoke about it since.
How would you have reacted? Have you had a similar experience?