Yeah, if the players keep shooting each other because they can't figure out who's who, that's a sign of a problem.
Luckily, that's a problem you should be able to solve.
1st: use a grid AND tokens small enough to fit on the grid. That means, if you're using graph paper, use small tokens. Personally, I recommend using a 1" grid, because then the tokens aren't too tiny, making it easier to see stuff.
2nd: use DISTINCTIVE tokens for bad guys versus PCs. The simplest is to use coins for the bad guys, and 1 die from each player (they know their own dice...). This makes it pretty obvious who the bad guys are (hint, they're the flat people).
If you're not keen on using a grid (and the grid IS helpful for quickly setting the scene and identifying friend or foe), then you at least owe your players updated data. When Joe says, "I shoot at him!" you should say, "That's Billy's PC, are you sure?" Whenever a player does something odd, you need to assume it is because you are not giving them enough information. It's OK if you miss something, but you've got to recognize when the players need more information AND give it to them.
Also, people keep asking how long players are taking. I suspect that your players are second guessing their actions (especially when every attack roll might be against a friend). Once you make sure they have good info (can tell friend from foe), you should be able to put pressure on them to decide quickly. Don't let them back-peddle with I could do this or that. Get it down to the following choices:
move to here
move to here and attack
shoot this guy ( and take a 5 foot step)
Attack the guys next to me ( and take a 5 foot step)
cast a spell ( and take a 5 foot step)
Do something else ( and take a 5 foot step)
If they keep waffling, tell them, "you delay your action while you decide what to do, Billy, you're up." A couple of times that happens, they'll quickly get the sense of urgency, and decide more quickly. The key is to build that sense of urgency. Do that, and you're combats will be faster AND better because the tension and mood will be enhanced.
Additionally, the "move to here" choice means you can summarize if any AoO's happen, rather than let them spend 5 minutes choosing among 5 different routes to get to square X. A smart fighter will always move to avoid being hit, so once they choose the destination, assume they took the most optimal path that their movement allows. That means 6 squares if they choose to attack, or 12 squares if they full move. AoO's should happen because the enemy has good positioning, NOT because the PC took the worst route.
Janx