Before about age 3, celebrations are really for you and other doting relatives -- little kids won't remember a thing, and making a big deal might backfire (a noisy crowd can be scary). To keep things fun for all:
Invite family and the kids your toddler plays with regularly (four or five is plenty). An hour and a half is about right -- enough time to play, have a snack, sing, and eat cake.
Set up big toys -- pop-up mesh tents, oversize foam shapes and letters, riding toys, and baby strollers with dolls, since most 2- and 3-year-olds would rather roam around and run than sit still long enough to make a craft. Roll out a long piece of bubble wrap for them to stomp on. If the weather's good, take it all outside, and add sidewalk chalk and balls.
Serve simple snacks like cut-up fruit, cheese and crackers, or pizza bites. Fancier food won't dazzle a toddler.
Let your child help you pick out his party outfit and the music to play. Make a special paper hat or crown together with his name on it to wear on party day.
Extend the fun by playing hide-and-seek with some of the gifts after guests leave. Give him easy clues to find them, such as "It's in the room with the blue chair."