$500 for 10 guests? That's $50 a child for 5 year olds? I didn't pay that for my son's bar mitzvah!
Now's a good time to decide on your philosophy about birthday parties. When your daughter gets older and is in a class of 22 kids, what will you do? Invite them all? No one wants that! You will not want to be going to 22 parties throughout the year, and you will not want to buy 22 presents. I never wanted my son to "hold court" on his birthday and receive 22 presents either! (I like small parties where the kids can really socialize, where the birthday child gets a few gifts, and where the friends get to see him open those gifts so everyone learns the manners around giving and accepting with thanks.)
We followed the "age rule" - when my son turned 5, he invited 5 friends. If they didn't all come, oh well! They always had a blast!! We played simple, classic party games or they had a treasure hunt in the house or the basement. I got a book from the library on old games - because no one plays them at these expensive party venues - I got some good ideas, learned the rules, and used stuff in my house. We did "pin the tail on the whatever" in the basement (you could do "pin the royal flag on the castle" and just use a big sheet of butcher paper to draw the outline of a castle and stick it on the basement wall. You could, if you were really industrious, call an appliance store and ask for a refrigerator or dishwasher box - have someone put a quick coat of paint on it and then cut a few holes to be the windows and the gate. Cut down one side of it except on the bottom so it flops down to the floor still attached at the bottom, and add 2 pieces of clothesline - poof! Instant drawbridge! The kids will adore it - and if you only have 3 or 4 guests plus your daughter, you have an activity and a playhouse for as long as it lasts beyond that!
Scale back. Invite the few special kids via the parents - send a written invitation to the house (do not have the daycare provider or teacher give them out in the kids' backpacks!). Hopefully the parents won't tell the kids about it until the date is close, and don't have Alyssa talking about it with everyone.
I'm not sure what a princess party entails but perhaps a small craft where they make crowns? You can buy inexpensive crown forms at any craft store and then an assortment of jewels and features and sequins, and make the party activity a sit-down-at-the-table session - the kids get to keep their crowns of course which is part of the "goody bag" package (or all of it - I think goody bags are out of control too!). You could have the kids dress up in a bunch of hand-me-down things or inexpensive feather boas and jewelry from Goodwill or the dollar store. Get a few inexpensive decorations or even print out a bunch of copies of a castle, then draw in the letters of your daughter's name (perhaps preceded by "Happy Birthday") - one letter on each sheet, and tape them to a long string and suspend them like a banner along one wall. Honestly, the kids don't care - they just want to play and eat cake.
I disagree about parents staying at this age - 5 year olds who go to school or day care can manage for 90 minutes alone! The parent of the 3 year old niece can stay a) because the child is 3 and b) because the parent is your family. You, your husband and your sister or sister-in-law can easily manage 4-5 girls!
And your friends will be delighted that you started a trend of small, manageable, intimate parties without the huge expense. Believe me, the pressure of "doing one better" starts to build and pretty soon people are renting bouncy houses and ponies and so on, and it gets out of hand.