The dearth of Tolkien threads in CS distresses me. I blame the Obama Administration in general and Sharon Riggles in particular. Anyway, though I made this a poll, I am perfectly happy if a discussion breaks out.
You said it yourself: halflings.
The hobbits escaped into the D&D universe via the Ainu Midget Protection Program. They were inconspicuously settled into the Monster Manuel, calling themselves “halflings”. Of course, their cover is blown to heck and back, now that they’ve made themselves into player races.
Like the Dwarves (and Orcs and Eagles and such), they were removed from this world to make way for the Age of Man.
Smilodons gotta eat, same as worms.
The question is How, though. I mean, it’s pretty clear that the Dwarves went extinct; only Gimli got to go West, and their numbers were dwindling even before the Fourth Age (though they may have had a brief resurgence). The Eagles, contrariwise, surely went over Sea; they work for Manwe, after all, and Aman is probably more truly their home than Middle-earth. I’m fairly sure that the House of Telcontar hunted down & exterminated the Orcs during the first part of the Fourth Age. (Alternatively, they may have driven them all inside of Mordor, where they killed one another soon enough).
Elves obviously went over Sea for the most part, but some may have lingered and dwindled, becoming the source of the distorted legends about elves we see outside of the Greater Perfesser’s works.
But Hobbits are another story. No matter what Treebeard (or they themselves) thought, they were spiritually Men–just a very short tribe. So they may have just been absorbed, or they may have gone extinct in the sense that, say, the Etruscans are extinct.
Hidden, but without any particular help from the Ainu or other Powers, so I chose “Fool of a Took”. They just have a natural knack for being unobtrusive, and we Bigs have a natural knack for being unobservant.
Fool of a Took! It’s “Fool of a Took!” not “Fool of a Took.” !
After watching the ROTK cartoon, my pal Amber asked the question Gandalf suggested “Might there be some hobbit in you?” I responded, “I’m fat and lazy and live in a hole at the end of the hall. I think the case is clear.”
Fool of a Took! He said “Fool of a Took” not “Fool of a Took.”! The punctuation was left ambiguous!
Stupid fat hobbit! 
That’s the POINT! The exclamation point is not optional.
If that hobbit is Sean Astin or Dominic Monaghan, I can only hope.
Merry and Pippin drank Entdraught and grew, this may have changed their genetics and the tall genes got passed on. I thought it was hinted at that hobbits eventually blended in with humans. So maybe those of us short people are descendents of hobbits? You know, sometimes I think my feet are a little too hairy to be normal.
SPEAK NOT OF THE ANIMATED ROTK MOVIE!
That way lies madness.
Where there’s a whip… there’s a way!
Indeed, Hobbits are originally “a Mannish race” and in the prologues to *The Hobbit *and The Fellowship Of The Ring, are described as still around but even smaller than formerly and very shy of “The Big Folk”. So yes, they’re still around, and yes, they could apparently interbreed with humans as they are closer in stock to us than Elves or Orcs and we know that they definitely can as well.
Now somebody else, go on and Google “hobbit pr0n”. I won’t because I’m at work but I’d be amazed if it came up blank.
“I suppose hobbits need some description nowadays, since they have become rare and shy of the Big People, as they call us.” - The Hobbit Ch 1: An Unexpected Party
Clearly implies that they are still around just not commonly seen.
You left out the option that they are fictional characters, fool of Nanook!
That was in the animated movie? Heh. It seems odd something I saw once would stick with me more than books that I’ve read several times.
:: makes note in ShibbOleth’s file ::
Keep it up, furball. You’re one blasphemy of Athena away from a flaming bee-swarm attack.
I voted for option 2, but I suppose you’re right. And consider this: http://en.wikipedia.org/wiki/Homo_floresiensis