I just migrated from a SBS 2003 server to windows server 2008r2. I created a NEW folder redirection policy and applied it to the domain, not the OU. The policy has applied to all of the windows 7 machines, but not the XP.
I have ran gpupdate /force multiple times. I then rebooted each client 4 times. The machines are no longer pointing to the old server, they are all pointing to c:\d and S\<username>\my documents and copied the data from the old server.
There are no event viewer entries for Folder Redirection errors from what I can see.