Ok, here's what I think:
For Smaug, I really think it should be Andy Serkis, the same with gollum. For Bilbo, they should get some young unknown that looks like Ian Holm, not Ian Holm himself. He's way way way too old. I do think that Legolas should make some uncanny appearance, but just when it seems that he couldn't.
For the dwarves, I think they should get a whole new group. For Gandalf, no doubt in my mind it should be Ian McKellen, or however you spell his name.
As for the news about PJ actually making the Hobbit, I haven't heard anything definate, but I do believe that he might make it. At least that's what I've heard.