the problem i was facing the same as you are facing
right now, i'll explain you the scenario which i am
working may be that will help you, in my organization
there are all portal users for which audience  is
already available in SPS, but i needed more audiences,
one is students, second is marvel(marvel is an
application development department in my university
where i work), so to make these audiences i did
following steps....
i made an audience called students and entered its
description and then i realized the property of all
the students in my university that all of there
account names start from the value '2', and no other
user account ha s avalue which even contains the value
'2' so i selected the property account name value
contains the value domain\2, and then i compiled and
it worked fine............. then i saw i had about 332
members associated with this audience......., but when
i came upto the audience marvel i had ot open up the
active directory and in there i selected all the users
related ot marvel and in there properties in the
department section i wrote marvel and then i created
the audience for which i selected satisfy all the
rules and in the user property section i selected the
user belongs to department and then in the value text
box i selected value contains marvel and then i
created the audience......so this is how i did it, and
then there are other ways i created  other audiences
using active directory and user profiles from user
profile database in site settings on portal main area
in SPS 2003...

It really helped me to understand the concept. Yea! Its
ok even if I can hide some of the documents from viewed by other portal
members by adding specific Users to an Audience and then targeting it to
that particular doucment. But surprising all the portal members  (Users)
are still able to see the content. I have compiled the Audience and its
members are correct. Is it true that portal members who are not part of
targeted Audience can view documents if they have office2003?

It's pretty simple - Audiences are not security, just a special type of view
filter. Any user with the correct security permissions can see targetted
content regardless of their audience  membership if they go directly to the list
or document library and use a view which is not targetted.