On Reach, I think the ToEE approach was quite a bit simpler - to just allow attacks within 10 feet, including attacks on adjacent squares. I guess the reach weapons should be made a bit less powerful (-1 critical multiplier maybe) to compensate for this.
I wonder if this can be programmed by making some changes on the A* (or whatever pathfinding algorithm you're using) to treat spaces occupied by friendlies as empty to cross, but not to end their movement there
Yes it can be programmed like this, it's just a bit more complicated and in KotC it might have looked weird when a sprite walked through another.
Another troublesome thing is the lack of 5' step around corners or doors frames.
As far as I know this is not allowed in the SRD, is it?