After SFP07, we continued working on it. We launched a side project (http://news.ycombinator.com/item?id=16234 and http://news.ycombinator.com/item?id=18233) and put about a month of effort into that before deciding it wasn't worthwhile. We also launched an intermediate milestone that we'd mentioned in our application, which is linked in my profile. It's had the same lack of success that we predicted, though I was of course hoping that there may be an off-chance of it taking off. (We did it that way because we need the functionality anyway for the main idea, so might as well package it up and get feedback while we work on that.)
Well, some subset of "we". We had applied with 5 founders, and PG immediately shot back an e-mail with "too many uncommitted founders!" It became apparent that he was right, so the 3 that were not really into it left a couple months later.
Curiously, our schedule in the SFP07 app would've been nearly dead-on had we not done the 5-week side project. We were initially planning to launch Diffle in late April; it actually launched on June 1. Then we were going to prototype the main idea between then and the start of the SFP; we actually got our first prototypes done during the first week of July. Progress since then has been slower than we anticipated, mostly because I kept the day job through the summer (I'm in the process of quitting now, and really would recommend that anyone in a similar situation quit as soon as they have an idea - it's not worth the hassle of ensuring you own your own IP).