Ive just been through the whole process myself and just got my passport back yesterday, I have 2 months to land as a resident or it expires.
I applied at the end of September 2006, and yes all of a sudden you receive a letter saying "send your passport in to London" - they give you 60 days to send it in, or at least contact them, or again they cancel the whole thing. They then say that it can take up to a month to get your passport back, but fortunately it came back after 2 weeks.
Be patient, its quite frustrating that you cant just phone someone and say "where is my application on the To Do list", as you cant make any plans, but Im sure they would have contacted you if they hadnt received something.