The elves are leaving the world of men to the Island, call it Avalonfor lack of a better name, however the hobbits are not immortal and will die of old age while the elves, who are as far as age goes are immortal already, will continue to be immortal there as well.
The Hobbit was a great book, very simple to read, didnt have a huge amount of background fluff like the trilogy. I had a hard time with the first half of the first book and until just after the big battle in the third one it was relatively good reading and then it bogged down bad and I had to force read the rest of it. I wish the dwarves and elves would have played a bigger role in the final battles, and that Gimli wasnt used as comic relief in the movies. Hopefully in the extended version the Westerners will make an appearance with Sauron's army, they were too cool looking to not even show up in the third movie.