Paladin protection from evil:
10 foot radius
DMG:
preventing bodily contact by creatures of an enchanted or conjured nature such as aerial servants, demons, devils, djinn efreet, elementals, imps, invisible stalkers, night hags, quasits, salamanders, water weirds, wind walkers, and xorn. Summoned animals or monsters are similarly hedged from the protected creature...
...any and all attacks launched by evil creatures incur a penalty of -2 from dice rolls ”to hit” the protected creature, and any saving throws caused by such attacks are made at +2 on the protected creature‘s dice.
So, enchanted or summoned creatures (including summoned animals/monsters of an evil nature) are prevented from coming withing 10' of the paladin or using any body weaponry to attack him. The body weaponry is stated several times, really meaning that beings can not stand outside the radius and attack using their natural body weaponry.
That does not mean that nothing evil can come within 10', only enchanted or summoned creatures (Monster Manual list provided above) are prevented.
Any evil creature who does not fall into this category is still affected, but only by the second portion of the quoted section, attacking at -2.
Looking at Gillian's questions:
Can the paladin, say, use a crossbow with the aura active? Sure. Can an evil enchanted or summoned creature attack Gillian with a crossbow? Sure.
Can an ally be just within the aura and strike so the weapon is just outside the aura? (If so, I'm guessing this only would work on mindless, driven, or trapped evil entities.) Again, only enchanted or summoned creatures are prevented from entering the radius, but against them, yes an ally could stay protected while inside the radius. Keep in mind the area required to use melee weapons though...
Thoughts:
Monster Manual entry: Ghoul:
The magic circle of protection from evil actually keeps these monsters completely at bay.
Monster Manual entry: Ghast:
The circle of protection from evil does not keep them at bay unless it is used in conjunction with cold iron (such as a circle of powdered iron, an iron ring, etc.)
Monster Manual entry: Intellect Devourer:
Protection from evil will keep them at a distance
There are more listings, but I use the above to illustrate a few things. First, not all undead are held back by the protective circle (only those who are specifically mentioned, or have been "summoned" or animated by a cleric). Second, creatures who are affected by the spell typically include it in their write up.
Now I'm sure someone will bring up the thought that any monster who requires magical weapons to hit is "enchanted". This was true in BECMI, but I have been unable to find any such statement in the AD&D rules. If I'm wrong, let me know:
Rules Cyclopedia:
"Enchanted Monsters" are identified (i.e., the monster can only be harmed by magical weapons or is magically summoned or controlled), and these monsters can be affected by such spells as protection from evil 10' radius.
The DMG does define enchanted creatures as:
DMG:
magic-users, monsters which can cast spells, conjured, created, gated, or summoned creatures.
Caveats:
What happens when the Paladin attacks using melee weapons? Obviously, in order for that to happen, the paladin will have to be closer than 10', so during the round that the paladin attacks the creature will not be hedged out.
What happens if the creature is in a dead end and the Paladin approaches it. The creature will retreat until it's back is against the wall. If the Paladin continues to move closer, the circle will be broken.
Closing:
When something attacks/approaches Gillian I ask myself the following question:
Is it an enchanted or summoned monster (list and definition above)? If yes, then it is kept outside of his protective circle. If no, than all attacks are made at -2.