That is a sticky situation. When my sister got married, we did that and people were very offended (you live and you learn). We thought we were being nice by inviting them since they weren't going to be attending the wedding, but I guess we should have just left well enough alone. With that said, piggybacking on what some of the ladies above said, instead of having a large engagement party, have you guys considered having a large AHR? That way the invitations will indicate that the wedding would have already taken place. In today's economic climate, I think people will understand about the small wedding, but maybe more understanding after the fact rather than before.
Good luck!