Q: Iron Heroes seems to apply a -4 'attacking into melee' penalty for melee attacks that are made against opponents to whom you are not adjacent. Is this correct? It seems to make flanking with reach weapons completely useless.

Yes. According to p.179:

"If you attack an opponent who is not adjacent to you with a melee attack, such as with a reach weapon or because you have a long natural reach, you suffer a –4 penalty to your attack if anyone else also threatens that target. In this case, you and your allies (or whoever else may threaten the target) get in each other’s way. This penalty does not apply if you are adjacent to your target.

While I can see why this rule raises eyebrows, I am confident Mike meant it as written. "I run into the midst of the ogres, so they trip over each other while trying to get at me."

Flanking is still worthwhile with reach weapons since it gives you +2 to hit (and you might suffer the -4 even when not flanking) and may allow someone to sneak attack the target.

You could certainly house rule it out, however, or add a Hafted Weapon Mastery feat that negated this penalty (say at Expanded Mastery 5).