A transvestite is a person who dresses in a style or manner traditionally associated with the opposite sex. At the root of the word is the Latin vestire, meaning to dress. Transsexual means one who wishes to be considered by society as a member of the opposite biological sex. Some transsexuals undergo sex change operations, and some do not. Transgender is a more general term that includes transvestites, transsexuals, and anyone else who does not conform to typical gender roles. These terms are in flux, though, and some may disagree with these definitions.
Some dictionaries still define transvestite as one who derives sexual pleasure from wearing clothes normally associated with the opposite sex, but the part about sexual pleasure is outdated. Today, transvestite denotes anyone who often dresses in clothes normally associated with the opposite sex. One who derives sexual pleasure from cross-dressing may be called a transvestic fetishist or any of a number of other terms.
As for the question of which pronoun to apply to a transsexual or transgendered person, there is a simple rule of thumb: use male pronouns for anyone who thinks of himself as male, and use female pronouns for anyone who thinks of herself as female.
If karaoke embarrasses Westerners, and cross-dressing embarrasses Easterners, the perfect tax official would be a transvestite amateur singer. [The Standard]
Candy Darling was probably the sexiest transvestite that ever lived, but s/he wasn’t just sexy — she was also talented. [Westword]
Now performing (and living) as Justin Vivian Bond—with a middle name added to reflect a transsexual identity—s/he has released a pretty terrific solo album. [Knoxville Metro Pulse]
Chrissy Lee Polis, a 22-year-old, post-operative transsexual was at a Baltimore County McDonald’s recently. [Pride Source]
Chaz Bono, singer Cher’s transgender son, recently offered to talk to Pitt and Jolie about their daughter’s gender identity. [Daily Mail]
Parker appointed Phyllis Frye, a transgender attorney born as Phillip Frye, as a muncipal court judge. [Houston Chronicle]