So, today we found a huge error by omission in the 5061 MOSS course I was teaching. An activity has you active audiences for an announcement list and then assign audiences directly to items. For the first time I actually had a student test the functionality instead of just assuming it works like the book says. Turns out, it doesn't.
Most Web parts are not capable of reading and filtering items based on audiences. The Content Query web part does. So, you need to use a Content Query web part to filter the items in the annoucement list based on audience. Not as pretty, but functional.
Personally, I'd stick with using audiences at the Web Part level rather than item level. There are no special requirements for that to function.