Awhile back a fellow told me about an additive for grout. He told me that it turns your grout into substitute for thin set and this works very well when installing small (1x1 tiles). Anybody ever used this? Any thoughts on its drawbacks?

You were given good advice. The additive, a latex polymer increases bond strength and reduces the chances of cracks in the grout joints when used correctly, especially with smaller tiles. It also increases the amount your floor or wall can flex before cracks form. Also, you are setting and grouting at the same time. Grout, when cured, is actually stronger than mortar or acrylic adhesives for these types of installations. There are several brands of "admix" and can usually be found at your local home improvement center or tile supply.

Am I correct thinking that I can use this additive instead of thinset? Keeping me from having to scrape out any overage thinset between the tiles and allowing me to clean up the tile as I go?

Sorry for the delay, but yes. I would highly recommend that the surface you are bonding to is VERY flat, be it floor or walls. Mix the grout replacing all or part of the water with the Admix. Install using a 1/4x1/4 or 5/16v notched trough. Allow it to set at least 15-20, but no more than 30-45 minutes before cleaning it with a sponge as you would for cleaning grout, being careful not to shift tiles as you are cleaning. Don't do more than you can clean at a time. If possible, allow the grout to cure 30days before sealing(the longer the better).

Came out beautiful, no more scrape out thinset...

Glad to hear it! This way too, you know the grout joints are completely filled. ;D