My DD turned 4 in December and we had a lovely party for her (if I do say so myself :))
First, make sure you put a start and finish time on the invitations....and 2 hours is plenty at this age.
Second, as a PP said, have a written plan that you can refer to, so you know exactly what's happening, keep the rhythm going, so no boredom / poor behaviour sets in. My feeling is that they like structure at this age and are not really big enough to play on their own in a big group without arguing / causing major havoc to your house.
This was our plan:
Arrive: issue each child on arrival with a sticker (normal address label type sticker) with their name on it for them to decorate. Few felt tips needed, nothing major. Gives them something to do immediately, then they wear the sticker so you know who is who (assuming you don't know all their names)
Hunt the thimble / bobbin / whatever: I hid dozens of thread bobbins all over the lounge / dining room (I had been collecting them for ages, but you could use anything), they were not very "hidden", just placed on tables, chairs, under the telly etc, so it was v easy to find them. Every bobbin = sweetie. We did this whilst waiting for everyone to arrive.
Pass the parcel x 2
Musical Statues
Musical bumps (which was more popular than statues, FYI)
Magic Number: I bought a giant die for this game, but you could use a normal size one or even bits of paper with numbers on them in a hat. On the floor, I put A4 pieces of paper numbered 1 - 6, plus some blanks. The children had to walk around from number to number, then I threw the die, whoever was on the number which came up won a sweetie.
Dancing competition: have lots of child-friendly songs at the ready (Abba etc)
Then, to wind down a bit before the party tea, we got a very large piece of card (A1 size) and got each child to draw round their hand with coloured felt tips. It was fun and then after the party, we pinned the poster up in DD's bedroom, she's delighted with it.
Party tea: sandwiches, jelly, fairy cakes, crisps etc. all eaten as a picnic on the floor. I made tiny fairy cakes, using the very little cases that are sold for truffles; they are about a third of the size of usual fairy cake cases and are quite big enough for little ones. Plus, instead of doing 12 normal sized fairy cakes, you can make about 36 tiny ones, it gives a lovely visual effect, especially if they are all decorated nicely.
Then cake with candles and singing happy birthday.
The we got all the kids to lie on the floor in a kind of sunray configuration, I stood on a chair and took a photo of them from above and then afterwards we printed off the photo and sent a copy to each child with the thank you note.
Final dancing competition which meant the two kids who had not yet "won" any prizes / games could win one.
Good luck, hope it goes well.