OK- major research done by me here. I have posted on this many times. I just recently re-researched and have updated info:
You may not create or model any cake after a licensed character without express written permission from the company. You may use the plastic figures, approved edible images (sold by the company - not ones you printed at home) toys and other such items legally for the selling of your cakes.
Straight from the Disney site:
No material from any WDIG Site or any Internet site owned, operated, licensed, or controlled by us may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy of the materials on any single computer for your personal, noncommercial home use only, provided that (i) you keep intact all copyright and other proprietary notices, (ii) you make no modifications to the materials, (iii) you do not use the materials in a manner that suggests an association with any of our products, services, or brands, and (iv) you do not download quantities of materials to a database that can be used to avoid future downloads from any WDIG Site. The use of any WDIG material on any other Web site or computer environment is prohibited.
Most companies operate the same way.
Until November 2003, you were not even allowed to do it once for home use. But this has been changed as you can see, as long as you follow their rules.