What, if anything, happens when a spellcaster uses the Veil spell to disguise her allies as enemies during combat?
For example, if the party encounters a band of orcs, combat ensues, and the spellcaster uses Veil to disguise the party as the orcs, does that impose any penalties on attack rolls? Would it count as concealment? Would there be any other reason why a spellcaster would want to do this?
Like most interesting events, what happens depends heavily on the situation.
Does that impose any penalties on attack rolls?
Nope.
Would it count as concealment?
Nuh-uh.
Would there be any other reason why a spellcaster would want to do this?
Sure, given the right circumstances. For example, making your party members look exactly like your foes (with the appropriate Disguise check) could seriously confound the enemy's tactics--in the rush of combat, they might not be able to tell friend from foe, especially if they end up in the classic "bob grappling evil-bob" scenario. They might hesitate to strike--or, in the case of orcs, kill all of the duplicates just to be sure.
There are no guarantees here, though--perceptive enemies might be able to follow character positions well enough to track who is whom. The GM decides NPC behavior, so she decides how well such a tactic would work.
Similarly, the PCs could turn into manifestations of the orcs' deity and its extraplanar servants in an attempt to cow the orcs into submission or frighten them off. Or, in a different scenario, the party might turn into something that their foes are unwilling to attack for some reason (e.g., cultural taboo). Again, the GM decides how well such a thing would work, and how/when/against whom you use such tactics should be deciding factors as to their success rate. (If you're into illusion spells, get used to "mushy" mechanics like this.)