I will admit that I haven't given it much thought, but I am under the impression that things that don't change (like size) are factored into a characters standard combat ability. If Tiny the Midget Trollkin has a 5W in two-handed short sword then I am going to assume that he is pretty darn nimble. The answer to the "shouldn't he have fewer hit points" question would be that his opponent never managed to land a solid blow durning the fight.
I would use stats like "Tiny 15W" for special size related contests. Frex: "Can I carry Tiny in my backpack and still make it back to the cave by daylight?" or "Can Tiny crawl into the badger's lair?"
-Paul
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