Aule did not want to wait for the coming of the firstborn (elves) so he created in secret the dwarves. When Eru found out, at first he was angry, but eventually Aule persuaded him to let the dwarves live. There were two things to note about this, though, one-- the dwarves were to "sleep" until after the firstborn arrived so that it couldn't be said that they were there before the elves; and, two--there would always be strife between the children of Eru and Aule. (this explains why dwarves and elves never really got along [img]smilies/smile.gif[/img] )--all this info is in the Sil.
As far as hobbits go--I'm not sure this is in every copy, but in my copy of the FOTR, at the very beginning before the story starts, there is some explanation about the hobbits. I never finished reading it, b/c I was too anxious to start the actual story, but if you read that it gives a vague explanation of hobbits. I will read it and come back to post about it!
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". . . All we must decide is what to do with the time that is given us."
"I pass the test, I will diminish, and go into the West, and remain Galadriel."
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