The incident occurred on the first day of a two day pageant to celebrate the 75th anniversary of Essendon airport. A flying dispaly was programmed to commence at 1300 eastern standard time, the first event being a multiple parachute drop from VH-KTD. Air traffic services planned to give priority to programmed pageant events. Before and between events, several local operators took the opportunity to conduct joyflights. Joyflight traffic was heavier than anticipated by air traffic services. Because the wind was a moderate south westerly, air traffic services established a left hand race track pattern using runway 17 for most departures and runway 26 for arrivals. Shortly before the incident, joyflight aircraft were being recovered to clear the airspace for the paradrop aircraft awaiting clearance for takeoff from runway 17. The aerodrome controller decided to require the pilot of VH-NAY, a joyflight aircraft on approach to runway 26, to hold short of the runway 17 strip after landing so he could expedite the takeoff of the paradrop aircraft. As NAY was already on final for runway 26 when the controller made this decision, he decided to wait until NAY had landed and slowed to taxying speed before issuing the hold short instruction. However, in the busy traffic situation the controller forgot to issue the hold short instruction to NAY and cleared the paradrop aircraft for takeoff. NAY entered the runway 17 strip (gable marker line) as KTD became airborne north of the runway 17/26 intersection. The incident would not have occurred if operations had been confined to a single runway. However, the use of runway 17 for departures and 26 for arrivals was a standard operating procedure in suitable weather conditions. The procedure increases traffic thoughput and reduces aerodrome controller loads. Use of the "hold short" requirement, once the landing aircraft has reduced to taxying speed, was common. The Essendon tower team leader was rostered on as an extra staff member in view of the expected heavy traffic. However, because he had attended the briefing for participating pilots, and was still relaying the details of the briefing to other tower staff, he had not taken up the position of assisting the aerodrome controller before the incident occurred. Significant factors: The following factors were considered relevant to the development of the incident: 1. Joyflight traffic was heavier than anticipated. 2. The extra tower controller was still briefing other tower staff and was not assisting the aerodrome controller when the incident occurred. 3. There was a degree of pressure on the aerdrome controller to ensure that joyflight aircraft were on the ground prior to the pageant commencing.