Assuming no zoom, I'd use the mouse wheel for up & down. If you can zoom in/out of the terrain, I'd use Ctrl-Mouse Wheel for up and down. Keeps it simple <img src="/ubbthreads/images/graemlins/smile.gif" alt="" />
As for combat - there will obviously be stuff that uses ranged weapons from the air, and they shouldn't be hittable with normal melee weapons - not unless the character can fly up to them. Obviously with the character flying, there will be monsters that are just sitting ducks - or running ducks. No reason they shouldn't run if they can't hit back, after all.
If a creature or character melees with a ground based opponent, they could get a height bonus on normal attacks and a charge bonus on first attack if they swoop - especially with a spear or lance or other long pointy polearm. Obviously they'd be attackable with melee weapons from the ground once they were in melee range.
That's how I'd do it <img src="/ubbthreads/images/graemlins/smile.gif" alt="" />
