Though generic races are part of what turns a setting generic. Using anything overly familiar creates difficulties (Going for completly "new" ideas does too of course. Most importantly the "Why should I be interested in this?" question of potential customers). Elves and dwarves are fairly clearly defined as fantasy races and the archtypes that come with them. If you stay too close to the known model, you run the danger of having that part of the game dull and forgetable. If you deviate too much from it, you miss the whole reason to have the races in the first place. The question is then, how do you add personality to something overly familiar without alienating the audience and without making your changes appear like a gimmick.
One way is to take the races from a familiar environment and put them in an up until then unfamiliar one. Of course once it has been done a few times, it looses its effectiveness.
Prime examples for this option are Shadowrun, Warhammer 40k but also Spelljammer and Dark Sun.
Dark Sun looks at Elves and aks the question: if elves live in nature, away from the bustling human metropolises, but that nature is vast deserts, how would their culture be then?
Warhmmer 40k looked at Squats and while they had made attempts at explaining the "dwarf" presence in the setting, ultimately decided it just didn't work and had the whole species nearly wiped out. (Jervis Johnson wrote up a great explanation here )
The other option is to take the setting and enter an unfamiliar variable, then explore how that would affect the world and races that inhabit it.
Arcanum attempted this and created a very interesting setting. The two races though, dwarves and elves, are probably the most forgetable part of it. Of course that is part of the setting. The human industrial revolution coupled with the usurpation of power by the gnomish financial interests leave no room for the old powers of bygone times, turning them into tragic side notes.
Dragon Age also, to a lesser extent, went this way with Dwarves, by removing the old, conventional racial enmity with orcs/goblins and entering the darkspawn into the equasion. The new enemy allowed for the otherwise fairly generic dwarveness to develope a feel and atmosphere of its own. The Legion of the Dead is not truly unique. In fact they are little more than Warhammer troll slayers without the wierd hair. But they work and the setting is richer for having them.
And Dragon Age brings me to the third way of handling races: saying "Our <race name> are different!" Which is what Dragon Age did with Elves and... well, they didn't need elves to tell that story. The nomadic people in the woodlands could just as well have been a human civilization, the city elves just as well a different human ethnicity. If elves had been left out, the exact same story could still have been told. What the game gained by having elves this way? They could briefly touch upon racism without any fear of controversy (which there would have been had it been humans living in squalor based on their skin colour instead of their ear-pointiness-factor) and well, they got to have elves.
But I better get back to work...
Was going to write something about the Witcher, AD&D's Birthright settign and others, but mostly forgot what
i think in the end I wanted to end wih something on the lines of: Let's see what Obsidian will do with these races to make them interesting without making them a gimmick and including them just so they can say they have pretty people wih pointy ears and short dudes who drink too much.