For the frosting on the cake, I would use whipping cream with a sugar substitute (stevia, equal, sucralose) for sweetener and flavoring (like vanilla). Two of the best kinds of cakes for diabetics are chiffon cake and angel food cake because they have lots of eggs or egg whites, which are high in protein. Chiffon cake has a glycemic index of 54 which could be considered low.
You could just find your own recipe for a chiffon cake and use xylitol for 1/2 the sugar (if the recipe calls for 1 cup sugar, use 1/2 cup sugar and 1/2 cup xylitol). This would reduce the glycemic index significantly without affecting the taste of the cake. I would not try this with an angel food cake, because the sugar helps to brown the cake and keep it fluffy.
You can actually use 1/2 xylitol for the sugar in almost any cake recipe and still get good results with great taste and a lower glycemic index. For more information on xylitol, check out this link:http://www.diabetes-guide.org/Xylitol.htm
Another type of cake that is good is cheese cake made with low fat or non fat cream cheese (sweetened with a low cal sweetener) because it is high in protein and lower in carbohydrates (which also makes it lower glycemic). For more information on the glycemic index of foods check out this link:http://www.diabetes-guide.org/glycemic-index.htm
Here are some tips for making any dessert more diabetes friendly:http://www.diabetes-guide.org/cake-dessert-tips.htm
Here are some cake recipes that might work for you (mainly the sugar is replaced with a sugar substitute).http://www.equal.com/recipes/search/lemon-pound-cakehttp://www.equal.com/recipes/search/carb-conscious-chocolate-cheesecakehttp://www.equal.com/recipes/search/fruit-layered-island-delighthttp://bakebakebake.livejournal.com/2373813.html
Best of luck with the birthday party.