While amusing, this is either made up as a joke or the DM was really into the idea and willing to overlook a bunch of common sense details (or provide some sort of magic items to compensate).

I'll grant that the halfling rogue could be breathing through a straw sticking just through the concubine's sphincter like a snorkel.

That being said, unless she's decidedly on the chonky side there's still a person about four to five times the size of a human newborn occupying her lower torso and this should be outwardly visible. A better thought out way to avoid this (which someone seriously pitching it absolutely would think of) is to first shove a small bag of holding up the concubine's butt and have the rogue climb into that.

Then if the game isn't a one shot that takes place over the course of a single day the concubine is going to have to either come out for food and water unless she's shoving those up there not to mention relieving themself. Possibly justify that by having the rogue come out for a snack when she goes off to privately relieve herself or bathe or something, but you're still left explaining why she's taking a sandwich with her to go take a dump.

Then the ability doesn't say anything about instantly climbing into the sphincter of an unwilling person, even if they're caught by surprise. It also specifically notes that checks would still need to be made to get into such spaces. I don't see any reasonable interpretation of it (even accepting the inherent fantastical absurdity to begin with) that doesn't give the victim some sort of saving throw or opposed check to prevent the 30-50 pound humanoid from getting up in there.

Then there's the matter of "whirling dervish" attacks from within a constricted space. This is actually probably the least issue, mechanically speaking, as IIRC 3.5 rules do allow for melee attacks with light weapons while swallowed by a larger creature (which would be appropriate rules to use even if they went in the other end) and while I can't recall if sneak attack damage still applies in such cases it would be kind of hard to not hit something vital so sure. And I suppose at that point a dramatic gory torso burst would be an appropriate description of the result.

Still it would just make more sense to hit the naked villain from behind with a regular sneak attack for the same amount of damage without having to justify burrowing into his colon. Or just rule him as a helpless target and use the rules for a coup de grace which grants an automatic critical. Or even more simply go full cutscene and deliver an assassin's death blow by burying a dagger into his brainstem or something.

Also, per the ability the minimum diameter for a small character (such as a halfling) to fit through is 1" and not 2." Doesn't really make a difference but it's the kind of detail that most people giving serious thought to actually carrying out such a scheme wouldn't miss. Because I've dealt with players arguing for some ridiculous things and they always come armed with as many rules based arguments that they can possibly cite. Heck, I've been the one trying to convince the DM of some goofy shit on multiple occasions. I never tried this one, but if I did you can bet your ass I'd be pointing out that my character only needs an opening a single inch wide to squeeze through.

Despite the rant I do think it was a funny story. I just like to nitpick.