Favors give guests something to look forward to and are a nice way to remember the event. They can support a theme, but keep them simple--two or three items per bag. A shell lei and drugstore flip-flops (you can attach an artificial flower) are good favors for a Hawaiian-theme party, for example. Useful items, such as notepads, pencils, and barrettes, are often fun too. Or you can let guests make their own favors. Give each child a disposable camera, and use it to take a picture of the guest with the birthday boy or girl. Then have the kids decorate picture frames as an activity and take them home.
Big chain stores are good resources for party favors, but also check discount clothing stores (for costume jewelry, hair ornaments, bandannas), drug and hardware stores, and art-supply stores. Avoid overloading kids with candy, and if it lives and breathes (goldfish, turtles), don't even consider it.
Prepare favor bags before the party, and label them with the guests' names. If favors include items related to the party's theme, give them out at the start of the event. Otherwise, hand out goodies while your child is opening presents (so very young guests won't be jealous) or as guests leave.