Reach isn't 2 way -- the shooter has to be adjacent to their target for the penalty to apply, not within their opponent's reach (or more importantly, their own)
I'm pretty certain that is not correct. See quote from text, below.
At any time, each opponent within a characterís Reach -- for a Medium character, in an adjacent square -- is within the character's Melee Range. Further, when 1 or more opponents are located within a characterís Reach, the character is "engaged in melee combat," even if he isnít directly fighting with nearby opponents.
Technically, parsing the grammar as written does allow for the shooters within reach of the beast to be considered not within melee combat if the beast is not within their reach. I think that falls into the "apply common sense" metric for evaluating rules, and if one character is considered to be in melee combat with another, the other character is necessarily considered to be engaged in the same melee combat. <shrug>
-- and importantly we're not talking reach, we're talking physical size
Oh. That's a pretty big misunderstanding on my part.