I don't pretend to know the finer points of transvestite vs. transgendered and everything in between, so please forgive me if I say incorrect things or offend.
Today, we were running errands and we were in a store. The person helping me, I would describe like this: from the neck down, looked like a guy; dressed like a guy (but that might have been the attire for the store we were in). From the neck up, looked like a guy trying to look like a lady - long hair in a ponytail, make-up very nicely applied, earrings, etc. - but very masculine features; sounded like a guy. So, I'm not sure if this "guy" was a transvestite or transgendered. In any case, "he" was clearly a guy who wanted to look like a lady.
I didn't notice Josh staring at all (thankfully) but at one point, he came up to us and directed some questions at this person:
J: Are you a boy or a girl?
(Mom is mortified.)
Guy/Lady: (after a long pause) I'm a girl.
J: No, you are a boy.
Lady: No, I'm a girl.
J: But you talk like a boy, not a girl. So, you are a boy.
(Josh starts to walk away.)
Y: (What do I say??!!) OK, Josh, that's enough.
The lady went on to say that it was OK. I clarified that I didn't mind him asking the question (as long as she didn't!), but I minded that he was denying that she was who she said she was. She was very understanding and said that she was impressed that at least he had the fortitude to question the disconnect. It didn't make sense in his mind, so he questioned it. The denial was just age, because it didn't make sense. But at least he asked the question.
She was very understanding and I was very relieved. It's not necessarily one of the topics they put in the Parenting 101 manual...