Yeah, the only real problem I have with the recon system is that having INDIVIDUAL soldiers popping up is too specific. If the plane could relay "small group heading north from church" and "large group, moving towards town square" or something, so you get small-ish dot by the church and a large-ish dot by the town square, I'd be completely happy with it.
Also, telling friend from foe shouldn't really be all that hard. The spotter is going to have a lot of information to help him. First, the pilot and spotter are going to have some general idea of which army is coming from where. If he sees a group of guys advancing from the west end of the city when he knows that his guys are coming from the east, he can assume the guys coming from the west are enemies, the same way you assume someone running at you from the other side of the map is probably an enemy. Secondly, soldiers are going to be wearing some sort of uniform, so the spotter only really needs to distinguish what color the dot he is looking at is. On top of that, there's a lot of other information the spotter could use to aid in identifying the side of the people he is looking at. For example, if he happens to see a halftrack helping out the soldiers, he can assume they are German, etc.