I've always disliked having hobbits in my game. I realize they are called 'halflings' but before DragonLance came out with the Kender race, halflings were hobbits and that was that. When I ran my custom game no one could play a hobbit or an elf just because I thought players were just picking them for the racial bonuses and playing them like humans anyway. I allowed many different cultures of humans and a mono-culture of dwarfs and that was it. If you wanted a decent hobbit or an elf then you could go play MERPs. I had NPC elves running around but they were an aloof bunch and didn't hang out at the local tavern bragging about being 200 years old and still in short pants. I was a teenager and I had to have some standards after all.
Well when I started playing Microlite, I described the races and classes and asked my kids what race they wanted their characters to be and they both said "a halfling!". I am almost certain this is because to them halflings are like "grown up" kids. Halflings are little and yet they get to play with daggers and hang out in taverns and go exploring old dark holes in the ground that may be full of monsters. They are little and they are looking up at everything so I can respect that, I'm not a teenager anymore. I did tell them that they had to wear shoes though. I also bought some minis for them to use and they were Reaper gnomes - I refuse to buy minis with hairy feet.
I think that it's probably best to leave the iconic races in the game now, however I don't really see the need for making gnomes a unique race or allowing half-elves. Hell I still think that since every single character in the real world and an overwhelming majority of fiction comes from the human race so if you can't work with that then you aren't trying. Still - this is a fantasy game. You have the standard elf, dwarf, and little person and that should be enough to satisfy people who don't want to play a human. If you want to role play you are going to have to put some effort into developing some personality instead of cribbing up a funny voice and printing off some minotaur half-goblin picture you got from Google image. I figure that if you want to do it, work it into the setting and make it unique, but I'm not going use them or to make any rules for it.