do a Princess Bride approach where they have our Ian Holm Bilbo telling the story to a group of little hobbits gathered on the floor or chairs around him (like at his party). We could even have Frodo, Sam, Merry, Pippin and maybe some others listening in with knowing smiles on their faces.
Remember in Rivendell when Frodo told Bilbo he used to pretend he was off with him on one of his adventures? This would be a way for Elijah Wood to play both Frodo and Bilbo as he imagines himself on the adventure. I know, I know, it's a stretch... but we do enjoy the fantasy of Middle-earth, right