Duh, I was looking in the GPMC. Yes, I know about disabled/enabled/not configured in the policy editor. I setup this R2 GP with the exact same settings as the 2003 AD TS lockdown policy which works on a 2003 TS. The answer to these 2 questions might help to clear things up.
1. In the R2 policy, In User config\Desktop\administrative templates\active desktop, the wallpaper settings are the same as in the 2003 TS policy yet there is no wallpaper on the user's desktop. Why?
2. The 2003 policy removes 'run' from the start menu and works on 2003 TS and the R2 RDSH. But since 'search' in the start menu is new in 7/2008, it will not be affected by the 2003 policy and will remain, yes?
I dont know if this is relevant or not, in the TS users folder where the roaming profiles, nt.dat etc are, for my test user there are two folders: user.domain and user.domain V2. Is the V2 is from logging on to the R2 box with a different (in name) remote desktop policy?