Dictionary.com: a person, esp. a male, who assumes the dress and manner usually associated with the opposite sex.
A transvestite is any person who wears the clothing of the opposite sex so to appear to be a member of that sex. It includes males and females and may or may not be related to sex drive, to gender perception, or to any of a number of things. Transvestites are also called crossdressers (a more PC term) and a large percentage of them are heterosexual males who are happily married with children and never have a homosexual act in their life (this is often the assumption by the 'average' person "that means you're gay, right!?" No - in fact guy men don't get transvestism nor are they interested in a transvestites, they want a man who looks like a man.)
Well...that's the textbook definition
It's way too broad, though...
A transvestite is a man who regularly wears women's wear. I don't think you should call guys who do drag in movies--Milton Berle, Tyler Perry, Eddie Murphy and others--transvestites, so long as they just do drag on set. But guys who go into character all day, or who regularly hit the clubs dressed? Yes. They're transvestites.
Not all transvestites are men, there are women transvestites, they are rare because society allows women to wear almost anything they want, whereas men have only specific things that they are "allowed" to wear.
A man who dresses as a woman, on a habitual basis, is known as a transvestite.