I'm currently working on this myself, creating a tiny slightly insectoid faerieish race. It flies, and fast flying doesn't seem that odd to me (and I do like the idea of an altitude limitation), but it'll probably still only have a move of four.
Might scale damage down slightly, but I'm pretty sure that a tiny dagger slicing open veins can do just as much (if not more) damage as a normal dagger slicing open veins.
My big issue is this: Four tiny creatures fit in a square, yeah? And it has a reach of 0, so it has to move into the square to attack. Do you think it's necessary to indicate what side of the square it occupies? Before anyone says, "no, why would it?" allow me to say: flanking. How the heck does flanking work with tiny creatures? I can't seem to figure it out/find it in any book. Is it buried in the DMG somewhere that anyone knows of?
Now, the easiest way to deal with this is to just say, no, it can't flank. Tiny is too tiny to really divert attention from the medium sized guy with the very large sword. And I'd be willing to accept this if we were talking about monsters but... A) The race is going to be +2dex/cha, and they're meant to make good rogues. And what, exactly, is the use of a non-flanking rogue? B) Since it's a PC class, that means that somewhere out there is (possibly) a 30th level rogue/sorcerer. Monsters would be wise to watch their backs, no matter how tiny the PC may be.
Any thoughts or resources for this issue?