Personally I think that the house rule seems rather acceptable, but with the slight addition that if you ignore the Rogue, then you don't just get an AoO, but he can sneak on his turn. If you can sneak someone when he's severely distracted (i.e. flanked) than you should be able to sneak someone when he's completely ignoring you just fine. A moot point anyway, as anyone who just got sneaked will certainly turn his attention on the sneaking character anyway.
But quite worthwile for the rock-and-a-hard-place duo, e.g. a rogue and a enraged barbarian. Just following the letter of the house rule (unless I'm mistaken), Theodore Troll could just concentrate on Bob the Barbarian while ignorin the measly pinpricks of the rapier-wielding Roderick Rogue.
Now about spells... I have no big problems with the rules here, they don't unbalance the game that much -- if every player of mine would turn AT, then I would just take a hint from console RPGs and unleash the Dread Slime Hordes of Doom! But the logical aspect kinda disturbs me. It's bad enough with some weapons, but some spells really break me picturing the sneak attack.
I always imagined SA's as targeting vital spots, hitting where it hurts etc. Backstabbing. Now the rogue attacks with a 1st level Fire Orb. That spell doesn't really cause that much penetration damage, more a large surface area -- which is nasty enough, but targeting the vitals with it? Melf's Acid Arrow, okay... No big deal in the end, just devise a "Demi-magical Missile", doing 1d4 damage, but requiring an attack roll. Under-powered normally, but just right for a sneaker. But a lot easier on the imagination (30 pts of damage from a fire orb doesn't evoke a precise hit but burning the opponent to a stump)
Anyone sharing this severe lack of imagination? I know, simplicity's sake, abstract combat system, yadda yadda...