The thing is, if you are going to set text in Photoshop, you have to design with a resolution in mind that can handle that text. If you are doing stuff for the web, you are stuck at 72DPI, which can’t handle text that small.
SO the bottom line is, you need to start you project at a resolution capable of doing what you want, maybe 300 DPI.
If you started at a low res, you can’t really increase it now because everything will be distorted.
Personally I never set small type in photoshop.
Jeff
http://www.willinois.com