There most definitely is still a market for people making desktop applications. Take Sparrow (http://sparrowmailapp.com/) for example. They seemed to be doing well for a desktop application - so well they got acquired by Google. An number of other applications I have purchased on my Mac are done by small teams: Alfred, 1Password, TextExpander, Things, Coda, Tweetbot. As other comments have mentioned, it may be easier on the Mac due to a perceived higher quality & richer client base. Independent games are also doing very well. Look at games like Braid & Limbo (true these also were XBLA titles). Games are still desktop applications after all.
So yes, I'd say there most definitely is a market for desktop apps & I wouldn't be surprised if the market was the strongest it had been for a while with the rise of the Mac App Store.
They seemed to be doing well for a desktop application - so well they got acquired by Google.
I think the general consensus was that the correct characterisation of that was that they were doing so badly that an aqui-hire was an attractive exit. Google certainly didn't buy them for the app...
So yes, I'd say there most definitely is a market for desktop apps & I wouldn't be surprised if the market was the strongest it had been for a while with the rise of the Mac App Store.