This article is from the Anime FAQ, by Steve Pearl with numerous contributions by others.
That practice is known as "Super-Deforming" characters. It's a way of making even the most horrible monster into something small and cute. As far as I know, the first occurrance of this was in SD-Gundam. Nowadays, Super-Deformed characters are appearing *everywhere*. Here are a couple I can come up with, just off the top of my head. It seems to be appealing for some strange reason :-):
- Ranma 1/2 Nettouhen The 'eyecatch' sequences
- Video Girl Ai The postscript segments
- Dirty Pair The closing credits of the 10 episode OAV series
- Superdimensional Fortress Macross The opening credits (when the series was rerun recently)
- Gunbuster The science lessons
- Gall Force 10 Little Gall Force
- Patlabor on Television The first 'eyecatch' sequences
- SD Gundam OF COURSE!!
- From a post by Alan Takahashi