I have made some shirts with iron-on transfers for the Baha Cat. My favorite is this one:
I resized pictures I had found in the web and created some myself from my own photos and printed them on a sheet of iron-on transfer paper (siirtopaperi). All you need is the paper and a color inkjet printer. The transfer paper is not cheap, but you can fit a lot of these tiny pictures on one sheet to save material.
The sheet on the left in the picture is a black and white test sheet I printed before printing on the actual transfer paper. This way, you can catch any problems before final printing.
When printing on the transfer sheet, you need to select the appropriate paper type in the printer settings as the printed image needs to be a mirror image of the original (as you can see in the picture above). This setting can be found in Printing Preferences (Windows XP) or something similar. The settings and available options vary depending on the printer, but if you have a color inkjet printer, you should be able to find "Transfer paper" in the paper type list.
In clothes as small as these, it is best to iron the transfer picture onto the fabric either before cutting the fabric or after cutting but before sewing. The instructions for ironing may vary between different manufacturers, so you should follow the instructions included in the transfer paper package.
Here is the doll wearing another shirt with a transfer picture: