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So, from a few other posts here the view point is that a mecha will provide cover and block LOS to another mecha. Please note that my personal opinion is in line with this reasoning, but I think things are a little more complicated than that in the rules as presented.

On page 12 of the rulebook under LOS it states "A mecha is only out in the open if more than 75%of the mecha is within the field of view of the mecha drawing line of sight. Mecha in the same squadron as the mecha that is attempting to establish a Line of Sight never block the LOS or field of view..."

On page 17 of the rulebook under cover section it states "Then there is hard cover that provides significant protection against incoming fire; hard obstacles like crashed spaceships, fortifications, buildings, rock outcroppings and other terrain features, MECHA OF A DIFFERENT SQUADRON THAN THE TARGET, and similar solid objects."

It would seem then, that to receive cover from a mecha, a third squadron would have to be involved. A Glaug would not receive cover from Pods in it's own squadron.

My group has started playing this as though it is a typo and replace the word target with attacker in the paragraph from page 17

I assure you it is a typo or badly written paragraph. Read page 11, the second paragraph of the LOS rules. Mecha block LOS. It is meant to say that friendlies do not block LOS because they can coordinate with each other and tell each other when to duck or move etc. But this is only with regards to units in the same squadron.

Assuming something is a typo can be super dangerous though. And while I mostly agree with your assessment there are a few things we know without a doubt.

LOS only exists if you can create a line between the middle of the attacker and the middle of the defender. Based on that we know that friendlies do not impede LOS for the attacker, But they do impede LOS to a defender. So we know that I can block line of sight completely then it probly should provide cover as well.

And we know that the examples of soft cover really are not big bulky tough armored things like mecha, so it seems obvious enough that any enemy mecha could create hard cover.

In summary though I agree it seems that in a tournament you'll probly run into a rules as written scenario where they can block LOS but cannot create cover. At least untill official errata fixes it. My local group is also playing it as hard cover but be wary this is hardly "rules as written" though it makes the most sense.

Perhaps a rule where the target gets the +2 for cover, giving the Glaug a total defense of 9 and if the shot misses and would have hit the "cover" then the cover is hit? In this case I would say the cover gets a +1 since he is not the primary target.

Example: A Glaug in open terrain behind a Battlepod. The attackers is a VF-1J in Battloid mode. He wants to target the Glaug but it has cover from a Battlepod giving it a modified DF of 9. The VF-1J rolls a 2 for a total of 6 with his 4 GN. Not enough to hit the Glaug. The Battlepod has a DF of 6. The pod will also get +1 since it is not the primary target raising the modified defense to a 7. If the VF-1J had rolled a 3 or 4 for the modified total would have been a 6 and 7 respectively. The Pod would be hit. Only on a 5+ would the VF-1J successfully strike the Glaug.

That's a little complicated. You could just say that the covering mech can share damage as though it was in close formation even if it isn't.

As cool as this sounds and It reminds me of other games that have successfully used something similar I think (and once again just my opinion). The rule that allows Friendly mecha to block and Take half the damage from a member of his squad kinda replaces the need for this since the description Is he is jumping in the way and taking some of the hit.

And this just occured to me but it might also be the reason the specifically say models from other squads can create cover and dont mention same squad. Because a model in the same squad being used for cover might simply be covered as blocking half the damage rather than actual cover at all.