I have a SBS 2003 and Terminal Server running Win Svr 2003 and having issues with the above GPO.
I have removed Authenticated Users from Security Filtering and added Security Group "TST GPO Password Policy" where I have a User in this group.
When I log on with User to the TS that is in this SG, and run gpupdate /force and then a gpresult the GPO is showing as:
Small Business Server Domain Password Policy
Filtering: Not Applied (Empty)
The User is apart of the SG, the GPO is enabled and applied to root of domain and all inheritance is not blocked.