Since most settings just kinda stolen from Tolkien's work, I really don't know what you could do with an underground race of Hobbits. Maybe you could go for an evil-mirror of the Shire for their society -- basically the hillbillies of the Underdark, with most of them lazy, fat and inbred. It'd make for an interesting take, being the Sloth to the Drow's Pride, but I don't know what else you can do with them.
Also, does anyone else think that the duergar are redundant? "These are dwarves, known for their deep mines and being grumpy, except even deeper and meaner."