2D collisions seem to be working well. In this case they are a bit more accurate than using a bounding sphere. So filled with enthusiasm (okay, stock market fear, but somewhere deep down there was some enthusiasm too) I went to show my project in its current state to a friend. What was his reaction? It was: "omg have you gone mad, you bought a mac, traitor!". It took a while for the situation to recover from that, but eventually he recognized that the iPhone is a pretty cool platform.
Sadly he wasn't all that into my project, and instead we started to brainstorm what I should REALLY be doing. That isn't so bad, as mostly coding this has been a learning experience. We agreed that it should be something with clear mass appeal, and something challenging enough that competition would be a bit less. We figured that maybe most developers are not as comfortable with network programming as we are, so we should make an Internet-based game. As bonus there don't seem to be very many of those yet on the platform.
But should I really just abandon this project I've been working on? It's been my experience that if you always abandon what you are doing when you discover something even better to do, you end up never completing anything. Have to admit though these lobby-based games would seem to have way wider appeal.