>we had about an inch of separation between our laser diodes and our photodiodes

Why can't you place them further away from each other using an additional optical system (i.e. a mirror) and adjusting for the additional distance in software?

You can, but customers like compact self-contained units. All trade offs.

Edit: There's basically three approaches to this problem that I'm aware of. Number one is to push the cross-talk below the noise floor -- your suggestion helps with this. Number two is to do noise cancellation by measuring your cross-talk and deleting it from the signal. Number three is to make the cross-talk signal distinct from a real reflection (e.g. by modulating the pulses so that there's low correlation between an in-flight pulse and a being-fired pulse). In practice, all three work nicely together; getting the cross-talk noise below saturation allows cancellation to leave the signal in place, and reduced correlation means that the imperfections of the cancellation still get cleaned up later in the pipeline.