We do no-gift parties. Actually, my twins are about to turn five (in February), so we have one coming up. It's not a big deal where we live, at least 50% of the parties we go to are no-gift parties. I showed my kids the video, "The Story of Stuff."
We talked about the polar bears and the ice caps melting. They understand and are fine with the fact that they'll each be getting one gift from us for their birthday (something homemade by me). I find that the fewer toys my kids have, the more special each one is.
As for the party, this year we are going with a puppet theme. I'm going to put on a puppet show, the kids are going to each make their own puppet (out of socks), and then we're going to have a treasure hunt (not puppet related, but we always do one, lol) with clues and the treasures at the end are special rocks that the boys have been collecting all year round. We'll also have a cake (I'm thinking of making an ice cream cake this year since my boys don't like regular cake).
We can't invite everyone because it's an indoor party (too cold to be outside), but we'll probably have 8-10 other kids over.