Trust me, the kids at that age don't care about all the fancy stuff! They just want to be with their friends, hang out, and eat cake and ice cream. Have your party in your backyard or at a park and let them run around and play games. If you're up for it (and don't want to have to plan and clean up), Chuck E. Cheese and McDonald's host pretty decent parties, and they aren't that much more expensive than what you'd pay for goody bags, paper plates, cups, etc. Plus they do all the set up and clean up and give goody bags.
Most of all, have fun!

I remember when my daughter turned two throwing her a huge party with tons of people, tons of activities. I remember watching her face throughout the party, and realizing that she seemed lost and overwhelmed, and she barely even wanted to open her presents. After that, I started making her parties much smaller, just four or five friends. This enabled her to feel comfortable, come out of her shell and have a really good time. This summer she will turn 6, and we are planning a small party in our backyard where we will bake the cake together from scratch, play some games, and walk to the park. That is much more my speed!!

I think I did a picnic party at a park for my daughter's 4th. Bought a couple checkered table clothes and put them on the grass, baskets from Michaels were filled with PB&J "tea" sandwiches, juice box, fruit and a tiny toy, then ordered a party pack from Baja Fresh for the adults. It was a park most of the kids didn't go to often. We may have had the requisite pinata. I think we did a game with ping pong balls and plastic cups around an obstacle course with soccer cones. Looking back on pictures from past parties, she seemed the happiest at this one, and it didn't cost me hundreds of dollars.