Cradle cap is fungal according to the results of much Googling. The best thing that seems to work for me is a wonderful product called MooGoo Infant Scalp Cream. There are a few threads in here about it... I'll have a look. Anyhow it is an all natural product with ingredients like lavender oil which is anti-fungal. It smells devine!

Ok... looking for the threads.... back soon!

ETA: HERE is a link to the MooGoo site.