We've been to Gymboree for birthday parties if you're willing to spend the money. There is also Dave who runs Chunky Onion, the kids shows that are ideal for birthday parties but best for kids 3+.
For our son's 1st party we video taped all the parents telling us in less than 2 minutes what they remember most about our son's first year of life. Each parent also had their own child say "hello" or wave, depending on where they were at on that particular road! (A few older kids spoke, too!) We ended up with some very funny and touching moments.
Year 1 we had in our flat. Year 2 we had on our building's playground which was a huge success because when the sugar hit (see below) the kids just kept on running until they were spent.
Re: the cake... you can get low fat cake mixes at most stores. For two years now I have made two cakes, plastered them together with icing, carved them up, and then made a fancy design. The kids usually sleep well when they come down from the sugar high. Year 1 was a porcupine (although my wife called it "roadkill") and Year 2 was a police car. (see below)
Step 1: scratch out a design on paper and plan how to build
Step 2: bake cakes
Step 3: light icing to glue cakes together
Step 4: carve cake design with sharp bread knife (save pieces)
Step 5: use extra pieces for structure (start using icing)
Step 6: cover cake with icing
Step 7: fix mistakes with more icing
Step 8: smooth everything over with hot knife
I usually always saw the top off one cake to make it more flat since they tend to rise in the middle. You can find pre-made icing at most stores, and food colouring at some stores but for sure at Great or Olivers (including tubes for trim.)
Have lots of toys, a video playing, and make several attempts at a group picture... always good for a laugh and you can keep the best shot forever.
