How can you have a female brain in a male body? If you have XY, you are male. Your brain isn't excepted from the rest of your biology just because you "think womanly." You are still biologically male.
Just because you identify with females, it still doesn't make you one. So I disagree with those who are saying "she" was just born into the wrong body. If you have XYs everywhere, you cannot be a SHE. Black and white. This part is not a grey area. You can be one, or the other. If you have both XX and XY in your DNA then we can talk. Or if you have XXY. But a XY is male, and a XX is female.
That being said, if you want to live your life that way, who am I to judge? Go for it. There are lots of people who identify mentally as the other sex, or somewhere in the grey area, and that is what the issue here is. That should not be disallowed, and frankly, even though I don't do it myself doesn't mean others can't. I try not to judge those sort of people.
If I met a "girl" somewhere who used to be a man, I'd be turned off. I don't know why, it's just ingrained into me. Is it wrong? This "girl" is good looking, and hooking up with "her" would be both strange and good (no worries for birth control LOL), but I don't know if I could actually do it.
On topic- if the rules clearly state (and it's a private contest) that a she must be born as a she, then the disqualification is just. Doesn't mean "she" shouldn't petition for them to change the rules, it just means this is an issue that society needs to reconsider.
Edit: a wiki link, from mykalberta's link above.
http://en.wikipedia.org/wiki/XY_sex-...ination_system
It's not so simple as just XX and XY, but I think my point is valid still.