I have seen a few custom minifigures out there with images on certain body parts never produced by LEGO. What is the best way to achieve this? I have heard of some people printing out the image on paper and gluing it, but I don't want to do that. That would look horrible even if I got the background of the picture to be the same color as the plain piece. I've also heard of printing an image onto sticker paper and applying it. That would probably work on a torso, but probably would do a bad job of deforming around legs, heads, or certain types of helmets. Anyone got any other ideas?
You can do that with scale model water decals. You can buy that in blank sheets and print out your designs with an inkjet printer. You can also use products that help those water decals set (adhere) and conform to the surface deformation and use scale model varnishes to seal it in place.
As stated in this other question about painting Lego bricks: Don't expect it to sustain the normal usage of Lego bricks. This is good for display or light usage (like playing D&D with custom minifigures)
The way that Lego does it is with whats called a "pad printer". Brickprinter.com also uses a pad printer. It takes a lot of skill to get the printing to work correctly. You have to have the proper amount of solvent in the ink to get it to adhere to the part and not smudge. The solvent also softens the ABS plastic so that the ink actually embeds into the part.
Pad printers are also quite expensive. On the order of tens of thousands of $$$ for one that will do multiple colors in sequence.
I've been looking at using special "direct to substrate" (DTS) printers. There is an inkjet printer that has a 5000+ dpi resolution, can print on ABS using solvent inks, can print on an object upto 2" thick, and also has the capability of printing pigmented white ink (so you don't have to only print on white bricks). This printer is also expensive, though not as expensive as a pad printer. Used on eBay runs about $5000.
For the general user, it's probably best to stick with water slide decals, since the average cost of a 8.5"x11" sheet of decal paper is about $1. There are different kinds of paper (inkjet and laser), so make sure you get the right kind for your printer. Laser printed decals do not REQUIRE a clear coat to protect them, but I still do.
I also use an ALPS printer that uses resin based inks. The printer has been discontinued, but the supplies are still available. Generally colors are printed in layers, but in addition to the cyan, yellow, magenta and black ribbons, there are metallic silver, metallic gold, chrome silver, chrome gold, chrome magenta, chrome cyan and the most important color, white. This allows ALPS owners to lay down a layer of white (opaque), then add the semi-transparent (cyan, yellow and magenta) inks on top. Kodak used to make a printer (First Check) that used compatible ink cartridges and they also produced a Red, Blue, Green and Orange ink. Useful if you can find them, but pretty much impossible to find.