|Another solution that's less brute forced, but probably not as accurate:

|1) Same as (1) above

|2) Feed the signal into a comparator and create a square wave.

|3) Now the hard part.

|  I think you could easily (okay maybe not easily but) create 8 DFT type
|square wave filters with self adjusting center frequencies. In other
|words, create 8 phase locked loops. The time between edges in the square
|wave can be used to control the center frequency.

This is pretty close to what I did; the one notable difference is that
I used three integrating square waves, 120 degrees apart, and after I
accumulated all the signals, I looked for the largest difference bet-
ween two of the square waves.  The net effect is that the input "wave"
is integrated with a signal that looks like this:

        ----        ----        ----
--    --    --    --    --    --    --
  ----        ----        ----

[those really are discrete steps, and the positive/negative parts
are twice as wide as the zero parts].  Note that this waveform is
completely devoid of the 2nd, 3rd, and 4th harmonics; a little bit
of analog filtering (using just R's and C's] will clean the upper
harmonics out of the signal reasonably well.

Anyway, I have done DTMF detection on a PIC and I can say that even
with dirtball hardware it works well.  CPU loading is pretty signif-
icant, but on a 20MHz PIC there's still time to do other stuff.
FWIW(PNM) the DTMF project is the only one with a 14-bit PIC where
I actually ran out of stack space, and with a little tweaking I got
things well under control (worst-case depth=6).  If you need to be
able to detect a wide variety of things of which DTMF is just one
flavor, the PIC-based approach has a lot to recommend it; if all
you need is DTMF, though, a dedicated chip may be a better approach
(if you don't mind running your PIC off 3,579,545Hz you can even
share the crystal!)