Birthdays can be crazy for kids. I think you've got the right idea to keep it small. Your daughter, and the other parents, will appreciate an intimate gathering a lot more. (If each kid brings a parent, now you have 8 guests!, etc.) Less is more for kid parties, generally speaking. Be considerate to other parents by discreetly asking the invitees for their address and sending the invitation to their homes. Let them know it will be a small gathering. Like a previous poster suggested, there are sometimes kids and their parents who become upset if they do not a receive an invitation. No one wants to feel left out.
One fun activity would be to have some dress-up clothes on hand or a face painting kit. Kids LOVE to have their face painted. Let them tell you what they want...they are usually very happy with their own imaginative creations. I do think it's fun for the kids to have a little something to take away from the party, and it doesn't have to be expensive. Large bags of mixed beads can be purchased at Michael's and other craft stores, just have some elastic or funky shoelaces on hand: voila! a necklace or bracelet.
Keep it easy and focus on the fun. The kids don't usually appreciate a bunch of planned games at this age, and at birthday parties, it's especially important that any games be cooperative. It's already hard enough at that age not to be the birthday kid; to be the loser at a party and watch someone else get a really nice prize is worse. That's why crafts are great, because the kids stay engaged and all go home with the same thing.
That said, in regard to gifts, I'd "think simple". Bubbles are something you can buy a large pack of and give to all the kids on their birthdays, and something everyone generally likes. Most families I've worked with complain that their kids already have enough toys, and so an consumable gift (something that the parents don't need to take care of, find space for and eventually goes away) is great. Packets of seeds are inexpensive, or a forcing bulb in a vase/jar full of rocks is also fun. You can package the rocks, jar, and bulb separately and include instructions for the child; let your daughter illustrate it or put a ribbon or two on the jar. Books on sale are always good, too. And handmade is wonderful, so if your daughter has an idea about what she'd like to make, roll with it. If those don't appeal, how about a packet of stickers, or a box of silly band-aids? I can guarantee the band-aids will be appreciated!
Happy birthdays!