Halfing has always been a bit of a niche race. It has a mountain of a drawback to overcome, namely the -2 to strength, the primary stat for 99% of non-casters. But until recently there was still a place for halfling players. With half-elf and half-orc there is, IMO, no reason to play a halfling anymore, other than for style points (which is why I still play 3 of them).
I do not propose that the FTP races be as powerful as the PTP races. Although I think they *should* be, I understand this would not necessarily be in Turbine's best interest. But I think that all of the races should, at the very least, have a few advantages that will suit certain builds.
The main two advantages to halfling are the +1 size bonus to armor class, and the halfling cunning/guild enhancement line. I believe that these are thematically appropriate bonuses, and would like to suggest that the race could become a viable choice by expanding upon these.
Regarding Armor Class
The +1 bonus to AC is handy on a AC build, but will rarely be on any use. To contrast, a human build could obtain a +1 AC bonus by taking two weapon defense, or dodge, with their extra feat, yet you will not find many (if any) builds, even AC builds, that recommend these feats unless required for a PrE. One armor class is simply not worth giving up a feat for. Armor class however is one of the things that most players will admit is broken end game. Giving the opportunity to increase this through AP could give the halfling class back it's niche role. I would suggest a line of halfling improved dodge I, II and III, with a cost of 1,2 and 3 AP respectively, with each tier improving the characters armor class when unencumbered by 1.
Regarding Sneak Attack
The bonus to sneak attack and damage have always been very handy for a halfling. It was never worth choosing halfling JUST for the cunning and guild, but they were a nice selling point if you also wanted the dex bonus, size bonus, or just wanted to be super cute. However, half-elf rogue dilettante provides a greater bonus to sneak attack, for far fewer AP investment. The halfling version costs 20 AP for +4 to hit and +8 to damage. The half-elf version costs a mere 6 AP for +10.5 to damage. Really? Half-Elf costs 30% what halfing costs, but provides 30% more damage. This is just totally unacceptable.
My suggestion for fixing the these enhancements would be two fold. First, increase the damage for each tier of halfling guile to +3, for a total of 12 additional sneak attack when maxed out. This is the same as the cost/benefit for the rogue sneak attack training line. This will make it comparable to the half-elf sneak attack line, still leaving half elf with all the juicy healing amp, damage boost (which just got very powerful) and adaptability enhancements. Second, uncouple halfling cunning and guile. Allow purchase of the guile enhancements without purchase of the cunning enhancements. This is, again, of the same design as the rogue enhancements for sneak attack training and sneak attack accuracy, which are not coupled in this fashion. This would allow halflings with a good to-hit to purchase the damage line for only 10AP instead of 20 if they so choose.
I think the combination of these suggestions will bring halflings back into the mix for some rogue and monk builds (which all seem to be half-orc and half-elf these days respectively), as well as remaining a non-terrible choice for general melee builds (though still below the power of the PtP classes). The enhancement line for sneak attack will have the same cost as the similar rogue enhancement line, and the potential AC boost will give halflings a small (heh) advantage for some niche builds.